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Roadmap for the Establishment of an ICT Business Incubator in

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					                            REPUBLIC OF ETHIOPIA
                        MINISTRY OF CAPACITY BUILDING

                    ETHIOPIA ICT DEVELOPMENT AUTHORITY




         Roadmap for the Establishment of an
    ICT Business Incubator in Addis Ababa, Ethiopia




                              Preliminary Draft
                               22 March 2004




                                   Prepared by
                              Dinyar Lalkaka
                                dlalkaka@btds.biz

               Business & Technology Development Strategies LLC
                               New York, USA
                              http://www.btds.biz




Japanese PHRD-funded grant
for preparation of the proposed
IDA-financed ICT Assisted Development Project
Ethiopia ICT Incubator Roadmap                                                                                                      Page 1


                                                     Table of Contents
Preface................................................................................................................................. 3
Executive Summary ............................................................................................................ 4
1.      The Private ICT Sector in Ethiopia............................................................................ 7
        1.1.     Country Background.................................................................................................... 7
        1.2.     The ICT infrastructure ................................................................................................. 8
        1.3.     ICT Human Resources................................................................................................. 9
        1.4.     The Private ICT Sector .............................................................................................. 10
        1.5.     Obstacles to Growth of the Private ICT Sector in Ethiopia....................................... 11
2.      Business Incubators and Technology Parks............................................................. 13
        2.1.     Business Incubators vs. Technology Parks ................................................................ 13
        2.2.     The Development of Business Incubation Worldwide .............................................. 16
        2.3.     Not-for-Profit Status and Financial Sustainability..................................................... 19
        2.4.     Achieving Sustainability............................................................................................ 21
3.      Objectives, Clients and Sponsors............................................................................. 23
        3.1. Mission and Objectives.............................................................................................. 23
        3.2. Sponsors..................................................................................................................... 24
        3.3. Target Client Groups ................................................................................................. 27
4.      Governance and Management.................................................................................. 30
        4.1.     Proposed Organizational Structure ............................................................................ 30
        4.2.     Board of Directors and Executive Committee ........................................................... 31
        4.3.     General Manager and Incubator Staff........................................................................ 32
        4.4.     Staff Recruitment, Compensation and Training ........................................................ 34
        4.5.     Coaches, Mentors and Strategic Partners................................................................... 35
        4.6.     Consultants................................................................................................................. 36
        4.7.     Integration with other business support services ....................................................... 36
5.      Buildings and Facilities Plan ................................................................................... 37
        5.1.     Building Cost ............................................................................................................. 37
        5.2.     Location, Floor Space and Layout ............................................................................. 38
        5.3.     ICT Infrastructure ...................................................................................................... 39
        5.4.     Accessibility and Maintenance .................................................................................. 40
        5.5.     Client Workspaces and Contracts .............................................................................. 40
        5.6.     Short-Term Options ................................................................................................... 41
6.      Services and Operations Plan................................................................................... 42
        6.1.     Incubation Framework............................................................................................... 42
        6.2.     Range of Services ...................................................................................................... 43
        6.3.     Pricing of Services ..................................................................................................... 46
        6.4.     Admission and Graduation ........................................................................................ 47
        6.5.     Seed Capital Fund...................................................................................................... 48
        6.6.     Monitoring and evaluation......................................................................................... 49
7.      Financial Plan........................................................................................................... 50
        7.1. Startup Costs .............................................................................................................. 50
        7.2. Operational Costs....................................................................................................... 52
8.      Implementation Plan ................................................................................................ 53



Dinyar Lalkaka, BTDS                                                                                                        March 2004
Ethiopia ICT Incubator Roadmap                                                                                            Page 2

9.      Vocational Incubator for ICT Microenterprises ...................................................... 55
        9.1. A New Incubation Model for ICT Trade Microenterprises ....................................... 55
        9.2. Framework for an ICT Vocational Incubator in Addis Ababa .................................. 56
Bibliography ..................................................................................................................... 60
Annex 1: Terms of Reference ........................................................................................... 61
Annex 2: Persons Met....................................................................................................... 64




                                                           Figures
Figure 1: Elements of Business Incubation ...................................................................... 13
Figure 2: Growth in Number of Business Incubators Worldwide .................................... 16
Figure 3: Development of Business Incubation Models................................................... 17
Figure 4: Geographic Distribution of Business Incubators, 2003..................................... 18
Figure 5: Sources of Incubator Operating Income in Europe, the USA and China.......... 20
Figure 6: Proposed ETI Organizational Structure ............................................................ 30
Figure 7: ETI Staff ............................................................................................................ 34


                                                            Tables
Table 1: East African Economic and ICT Indicators.......................................................... 7
Table 2: Basic Telecommunications Data .......................................................................... 8
Table 3: Primary Activities of ICT Firms......................................................................... 11
Table 4: Key Differences Between Incubators and Parks ................................................ 15
Table 5: Hypothetical Graduation Rates........................................................................... 43
Table 6: Estimated ETI Startup Costs............................................................................... 50
Table 7: ETI 18 Month Action Plan (3/2004 – 9/2005).................................................... 53




Dinyar Lalkaka, BTDS                                                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                     Page 3




Preface
This mission was undertaken at the request of the Ethiopia ICT Development Authority,
Ministry of Capacity Building, Republic of Ethiopia. It was financed by the Japanese
PHRD grant for preparation of the proposed IDA-financed ICT Assisted Development
Project.

The objective of the mission was to prepare a roadmap for the establishment of an ICT
business incubator and/or technology park in Addis Ababa, tentatively called the “Ethiopia
Technology Incubator Park” or “ETIP”. The Terms of Reference of the Mission are
included in Annex 1. This consultant visited Addis Ababa, Ethiopia from 1 March 2004 to
22 March 2004. A full list of persons met is included in Annex 2.

Many individuals facilitated the work of the mission. Special thanks in this regard are due
to Ato Bekele Gebremehdin, Ato Gemechu Geleta, Ato Yoseph Adugna, Ato Zinabie and
Wizarit Filfil, all of the Ethiopia ICT Development Authority, Mr Bobak Rezaian of the
World Bank, Ms Patricia Maughan, consultant to the Ethiopia ICT Development Authority
and Ms Daniela Zampini of UNDP.




Dinyar Lalkaka, BTDS                                                          March 2004
Ethiopia ICT Incubator Roadmap                                                     Page 4


Executive Summary
ICT in Ethiopia
1. The ICT sector in Ethiopia is small compared to that in neighboring East African
   countries such as Kenya, Sudan, Tanzania and Uganda. However, in part precisely
   because of its arrested development, given the appropriate stimulus, there appears to be
   considerable potential for growth. The Government of Ethiopia's ICTAD Project may
   be such a stimulus.

2. Factors inhibiting the development of the private ICT sector in Ethiopia include (1)
   weak domestic market, (2) difficulty of starting and growing a new ICT business, (3)
   poor ICT infrastructure, (4) lack of skilled human resources, (5) lack of government
   support, (7) lack of international linkages and globalization. A managed workspace
   such as a technology business incubator or technology park can make a contribution to
   mitigating these constraints, especially if it is conceived and implemented as part of a
   synergistic package of economy-wide initiatives.

Technology Parks and Business Incubators
3. Technology business incubators and technology parks have some features in common,
   but also some important differences. Parks emphasize physical infrastructure and cater
   primarily to medium and large-sized established firms, while incubators emphasize the
   synergy of workspace, services and access to capital, and serve small startup firms.
   Since ICT firms in Ethiopia are small and need of assistance with more than just
   workspace, it would be appropriate to begin by first establishing an ICT business
   incubator. It is proposed to establish such an incubator — tentatively called the
   Ethiopia Technology Incubator, or ETI — in Addis Ababa.

Proposed incubator sponsors and clients
4. ETI should be established as a public-private partnership between the ICT
   Development Authority of the Ministry of Capacity Building and a professional
   association representing the ICT sector. It may be appropriate to induct additional
   sponsors, such as Addis Ababa University.

5. Segments of the private ICT sector to be served by ETI include (1) knowledge-based
   ICT businesses, (2) ICT-enabled service businesses, (3) ICT sales businesses, (4) ICT
   training businesses, (5) ICT repair and installation businesses, (6) Diaspora Ethiopian
   technology businesses, and (7) technology businesses from other countries. As many
   ICT repair and installation businesses are close to the informal sector and have
   somewhat different needs from the other groups, it could be argued that they should be
   served in a separate incubator facility with a greater emphasis on vocational training
   and industrial clustering.

Governance and management
6. A Board of Directors, composed of representatives of sponsors and stakeholders, and
   an Executive Committee, composed of sponsor representatives, would exercise


Dinyar Lalkaka, BTDS                                                          March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 5

   governance over ETI. The purpose of both is to establish ETI's strategic objectives and
   to oversee the work of the General Manager. The General Manager would report to the
   Board and have overall responsibility for the day-to-day operations of ETI. Service,
   finance and technology departments would each report to the General Manager.
   Overall, ETI would have ten staff, with janitorial and security services outsourced, if
   possible.

7. All staff should be recruited on merit through transparent public competition. Salary
   scales should be competitive with those in the private sector. Compensation should be
   based on performance, with a potential bonus of linked to the achievement of clearly
   specified objectives. Staff retention and training are critical to the success of any
   incubator. Training should include study tours and an extended internship at an
   overseas incubator. Coaches, mentors, strategic partners, other business development
   services in the local community and consultants are some other important members of
   the business incubation ecosystem. Although bricks and mortar account for the
   majority of the cost of setting up an incubator, it is people who create lasting value
   through business incubation.

Incubator building
8. The incubator building will be the major factor determining ETI's total required budget,
   implementation timeline and financial sustainability. For ETI to achieve financial
   sustainability, it must be able to acquire a suitable space at no or very low cost.
   Acquisition of an existing underutilized but otherwise suitable building would
   constitute the best solution. The building should have a central location, in proximity to
   the business district, university, public transport, restaurants and shops. It should
   possess 1,500-2,500 m2 of usable floor space, of which at least 60 percent should be
   available to rent to client companies. This amount of floor space should be sufficient to
   accommodate 20-30 incubator clients. The standard of renovation should be functional
   and inexpensive, but presenting an attractive appearance will be important to marketing
   the incubator. A good ICT infrastructure, including genuine broadband connectivity, is
   absolutely essential to ETI's success.

Proposed services
9. ETI's incubation model includes pre-incubation, incubation and post-incubation.
   Pre-incubation provides very early stage ventures with the support they need in order to
   quickly and successfully introduce their product or service to the marketplace.
   Incubation is ETI's core function. It is anticipated that incubated companies will spend
   three to five years in the incubator. Over ten years, ETI should be able to graduate
   30-35 successful companies. Post-incubation provides support on a virtual basis to
   graduated and other relatively mature companies that wish to make use of incubation
   services outside the physical premises of the incubator.

10. Services offered by incubator staff and partners include general networking , business
    planning, market and technology information, training and entrepreneurship
    development, marketing and public relations, financial management and accounting,
    legal services, facilitation , purchasing and leasing, graphic design. Fees should


Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                        Page 6

   increase based on the length of client's tenure in the incubator. Admission should be a
   structured process, based on evaluation against fairly transparent criteria. Businesses
   admitted to the incubator should be those with strong growth potential. Graduation is a
   decision which requires flexible judgment.

11. ICT companies in Ethiopia have great difficulty in obtaining debt and equity financing.
    In order to address this problem, a seed capital fund of $250,000 is proposed. The fund
    is intended to be sustainable but not-for-profit, and would make small, short-term loans
    to incubator clients.

12. A commercial Business Center is proposed as an adjunct to the incubator. It would
    share physical infrastructure and staff with the incubator, would help international ICT
    companies overcome the barriers to entering the Ethiopian market, and would
    contribute to ETI's financial sustainability.

Estimated budget and timeline
13. At this early stage, costs cannot be predicted with confidence. However, according to
    rough initial calculations, the total budget required for ETI is projected at
    approximately $2 million. Start-up costs are expected to require $1,175,000, operating
    support to require $525,000, and the seed capital fund to require $250,000, for a
    provisional total of $1,950,000.

14. ETI should begin operations in the fourth quarter of 2005. For this to be possible, at
    least three buildings for possible use by ETI must be identified by May 2004, and
    renovation at the selected site must be completed by mid-2005. An incubator project
    manager who will serve as the focal point for all ETI matters during the planning phase
    and will later join ETI staff should be recruited as soon as possible.

Vocational Incubator
15. There is a significant population of entrepreneur-tradesmen in the business of hardware
    repair, systems installation, trouble-shooting, simple assembly and related services. A
    new business incubation model should be developed in order to provide these
    ICT-related microenterprises with the support they require.
16. The proposed model would seek to incubate these businesses as a community rather
    than as individuals. It would be built around their existing trading space, but would also
    permit businesses to be located in the incubator. Vocational and basic business training
    would be provided through strong links with a vocational school or college. This
    college and the Addis Ababa municipal government would serve as incubator sponsors.
    A seed capital fund would address the critical need for working capital. There is likely
    to be some scope for cost recovery, but the issue of sustainability needs to be examined
    in greater depth. A market survey and further empirical investigation is needed to
    confirm this model.
17. A preliminary budget for the vocational incubator would be around $750,000.




Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                               Page 7




1. The Private ICT Sector in Ethiopia
1.1. Country Background

Today Ethiopia is one of the poorest countries in the world. Real per capita GDP is US$100
– only about one fifth of the Sub-Saharan Africa average, and some 82 percent of the
population earns less than a dollar a day. With a population approaching 70 million, 51
percent of which is below age 18, Ethiopia is the third most populous country in Africa.
Agriculture is the mainstay of the economy, contributing about 45 percent of GDP,
followed closely by services at about 44 percent, and industry at just above 10 percent.
Agriculture is subject to chronic cyclical drought, which has affected the stability and rate
of overall economic growth. Exports are dominated by coffee, the price of which has been
in long term decline. Human development indicators are low: life expectancy is 42 years
and falling due to HIV, and nearly 60 percent of the adult population is illiterate.

Ethiopia has a long and proud history, dating from Biblical times. Amharic, the primary
national language, is unique among African languages in having a script many centuries
old. Despite Italian military incursions from the late 19th century to 1936, Ethiopia is the
only country in Africa that has never been colonized. While its neighbors in East Africa
were forcibly integrated into the world economy under the impact of Western colonialism
starting in the late 19th century, Ethiopia maintained its sovereignty and was able to pursue
more independent – and somewhat autarchic – policies.

Today, while larger in population and territory than its East African neighbors, Ethiopia
lags behind them in terms of economic, human and ICT development (see Table 1 below).
The number of TVs, fixed line phones, mobile phones, PCs and Internet users are all
considerably below those in neighboring countries.
                  Table 1: East African Economic and ICT Indicators
Legend         Units, Year                Ethiopia Kenya Sudan Tanzania Uganda      SSA
Population     millions, 2002                 67.3    31.3  32.4   35.2    23.4 688.0
GNI/capita     $, 2002                         100    360    350    280     250      450
Poverty        % people < $1/day, 2002        81.9     23      -      -    26.8        -
Adult literacy % pop. >15 years age, 2002     41.5    84.3  59.9   77.1    68.9     63.3
TVs            per 1000 people, 2001             6     26    386     42      27       60
Phone lines    per 1000 people, 2001             4     10     14      4       3       14
Mobile phones per 1000 people, 2001              0     19      3     12      14       27
PCs            per 1000 people, 2001           1.1     5.6   3.6    3.3     3.1      9.9
Internet users 1000 people, 2001                25    500     56    300      60 5,299.90
Source: World Bank, "ICT at a Glance Tables", http://www.worldbank.org/data/countrydata/ictglance.htm

Decades of war and turmoil in Ethiopia have finally come to an end, and with peace,
political stability and gradual economic liberalization, many of the factors that have
repressed development, including of the ICT sector, are abating. The Government of


Dinyar Lalkaka, BTDS                                                                   March 2004
Ethiopia ICT Incubator Roadmap                                                             Page 8

Ethiopia is strongly committed to the promotion of ICT as an enabler of its economic
development program. Although starting from a low base, the ICT sector in Ethiopia
appears to be poised for a period of significant growth.

1.2. The ICT infrastructure

The Ethiopia Telecommunications Corporation (ETC), established more than a century
ago, is the public telecommunications operator and has a monopoly over all
telecommunications services in Ethiopia, including fixed, mobile, Internet and data
communications. There has been talk of partial privatization of ETC and of permitting
private sector participation in the provision of telecom services, but these proposals have
yet to be implemented.
                        Table 2: Basic Telecommunications Data
          Total No. of Tel. Subscribers (fixed + mobile)                       499,790
          Total Fixed Line Subscribers                                         404,790
          Mobile System Subscribers                                             95,000
          Total Number of Subscriber (per 100 inhabitants)                          0.7
          Main Telephone lines (Total Connected)                               413,186
          Teledensity                                                               0.7
          Main Tel. Line Capacity Used (Total Connected)                       413,186
          Main Telephone Line (Residential %)                                   70.5%
          Total Residential Main Line                                          285,510
          Residential Main Lines (per 100 inhabitants)                             0.41
          Digital main lines (%)                                                90.0%
          Waiting list for main lines                                          146,062
          Public telephones                                                       3518
          Public Telephones (per 1000 inhabitants)                                 0.05
          Public Telephones as % of Main Lines                                     0.85
          Mobile subscribers                                                    51,234
          Mobile subscribers per 100 inhabitants.                                0.074
          Mobile Subscriber as % total Tel Subscribers                           11.24

         Source: Ethiopian Telecommunication Authority as of 10/12/2003, Addis Ababa
         Quoted in Yemene and Hailu, March 2004

According to the latest data, summarized in Table 2 above, the number of fixed line
subscribers is about 500,000 lines. There is a relatively small installed mobile phone
capacity of about 95,000 subscribers. There is a considerable waiting list for fixed and
mobile lines, and further expansion of capacity in both is planned or under way. The
current “teledensity” (fixed and mobile lines per hundred people) is about 0.7. Planned
increases in capacity over the next four to five years are intended to increase the teledensity
to near 1.0.

The Internet arrived in Ethiopia in 1993, at about the same time as in most other developing
countries. Growth in the number of subscribers has been slow, however, with only 6,000 as
of 2003. Downlink bandwidth is 10 Mbps, and uplink bandwidth is 4 Mbps. The system



Dinyar Lalkaka, BTDS                                                                   March 2004
Ethiopia ICT Incubator Roadmap                                                                      Page 9

reaches complete saturation and becomes almost unusable during business hours, with a
large number of packets dropped. Some 94 percent of Internet subscribers are located in the
capital, Addis Ababa. The cost of Internet access is high. “Broadband” access is generally
by means of 64 Kbps leased lines, for which demand exceeds supply despite the very high
cost (connection fees of US $500 and monthly fees of about US $1,000 for leased lines
were cited, but remain to be verified).

During the course of this consultant’s mission, poor connectivity was widely cited by
representatives of local ICT businesses as one of the greatest problems hindering growth of
the ICT sector in Ethiopia. It was also frequently cited by representatives of international
organizations and the diplomatic community as a major obstacle to attracting foreign
investment in any sector of the Ethiopian economy. The Government is aware of this
problem and a fiber optic link to Djibouti, the nearest node of the international backbone, is
expected to be in place within the next two to three years. In the meanwhile, the proposed
“ETIP” incubator/park can – indeed, must – find ways of providing its client companies
with good connectivity.

1.3. ICT Human Resources

Addis Ababa University is the leading national university and one of the major sources of
ICT human resources. ICT-related departments include the Department of Computer
Science, the Department of Information Science (which developed out of a library science
program) and the Department of Electrical Engineering. The Department of Computer
Science started some fifteen years ago as a concentration within the Department of
Mathematics, and was established as an independent department two years ago. This year,
the department expects approximately 40 students to graduate with a B.Sc. degree and
about 30 with an M.Sc.

Private colleges and training institutes provide ICT training to much larger numbers of
students. It was reported1 that “more than a thousand” students graduate with ICT-related
diplomas and bachelor’s degrees each year. Many, perhaps most, of the diploma courses
cover basic use of Windows and application software.

A small number of Ethiopians receive advanced ICT training in foreign countries such as
India. This group appears to be a significant presence in the local ICT firms with more
advanced capabilities.

There is some ongoing leakage of talent to other countries, but this does not appear to be a
significant problem. The reverse flow of expatriate Ethiopians with strong ICT experience
returning home (with apparently even larger numbers wishing to return home, provided
opportunities were available) may be a more significant phenomenon, and certainly
presents a major opportunity for any national ICT development strategy.



1
 By Dr Ahmed Hussein of Hilcoe, the largest private ICT training institute, and other participants in a
meeting with private ICT firms on 11 March 2004.


Dinyar Lalkaka, BTDS                                                                         March 2004
Ethiopia ICT Incubator Roadmap                                                                   Page 10

The fact that English is widely spoken by educated Ethiopians is a major advantage, with
important positive implications for Ethiopia’s emergence as a player in ICT-enabled global
services (such as call centers) in the future.

Overall, it would appear that there is a lack of well-qualified ICT personnel in Ethiopia, in
both quantity and quality. The present supply may be adequate to meet immediate needs,
but this is only because current demand is extremely small, so small, in fact, that even the
very limited number of ICT graduates have trouble finding jobs. Human resources will
become a constraint to the development of the ICT sector in Ethiopia if the ambitious plans
currently being formulated are fully realized.

Besides ICT skills and experience, human resources for national ICT development also
entails capacity-building in policy formulation and administration on the part of
government, and capacity-building in ICT enterprise formation and management on the
part of the private sector. These issues are intended to be addresses in the prospective
ICTAD Project. In terms of the private ICT sector, because of the generally repressed state
of the modern private sector in Ethiopia, there is a lack of proven models and successful
experience. More needs to be done to promote the emergence of entrepreneurs with
expertise in both modern business and ICT. Many steps could be taken in this direction, for
example, the creation of a cross-disciplinary program in ICT Entrepreneurship by the
Computer Science Department and the Faculty of Business and Economics of Addis
Ababa University. The establishment of the ETIP business incubator and/or technology
park is clearly another such step.

1.4. The Private ICT Sector

At present, the private ICT sector is small, but appears to have potential for considerable
expansion given the appropriate stimulus. Most estimates of the number of registered firms
comprising the sector cluster around 150. Besides the fact that the industry is reported to be
experiencing considerable flux, with firms being created and going out of business at a
significant rate, variations between estimates may reflect alternative definitions of what
constitutes an ICT enterprise. The Ethiopia Information Technology Professionals
Association has a membership of only ten firms.

As shown in Table 3 below, training, maintenance and sales are the activities in which the
majority of ICT firms are concentrated. The number of ICT firms in the narrow sense, i.e.,
those focused on developing new ICT products and services (primarily developing
software) as opposed to selling or maintaining products and services developed by others,
is much smaller. The survey quoted in Gebreyesus 2003 suggests that as many as a third of
the 127 firms surveyed were focused on ICT systems development, but other sources2
suggest that the number of genuinely ICT-centric firms is much lower, probably less than
ten. To the extent that Ethiopia wishes to one day emerge as a provider of ICT products and
services as opposed to just a consumer, it is ultimately on such firms that it must rely.


2
This was the opinion of several representatives of private firms who met with this consultant. Also see
Rostenne, 2003.


Dinyar Lalkaka, BTDS                                                                         March 2004
Ethiopia ICT Incubator Roadmap                                                                    Page 11


                               Table 3: Primary Activities of ICT Firms
                               Category               Number        Percentage
                               Training                      102           80.3%
                               Maintenance                    65           51.2%
                               Sales                          61           48.0%
                               Networking                     46           36.2%
                               Systems development            42           33.1%
                 Source: ICT Focus, February 2002. Quoted in Gebreyesus, May 2003, p. 33.
    Based on a survey of 127 firms. Percentages do not total 100 because of multiple responses by each firm

Most ICT firms appear to be relatively small, typically with less than ten employees, and
relatively young, only a few years old. The larger, more established firms, including most
of the firms with deeper capacity in software development and systems integration,
generally have in the range of fifteen to thirty employees and a history of five years or more.
Perhaps only two to three firms in the sector have more than fifty employees, and these
firms are typically in the training business.

While there are clearly some firms with significant technical capabilities and experience,
there is little question that the private ICT sector in Ethiopia is small and weak compared to
that in neighboring East African countries such as Kenya, Uganda and Tanzania. The
problem is not one of a lack of local talent, but of a lack of suitable opportunities to develop
and use the available talent. The following section examines the obstacles to growth of the
private ICT sector in Ethiopia.

1.5. Obstacles to Growth of the Private ICT Sector in Ethiopia

Based on a review of the available literature3 and discussions with representatives of
private ICT businesses, international organizations and embassies, significant obstacles to
growth of the private ICT sector in Ethiopia, in roughly descending order of priority,
include the following:

       1. Weak domestic market
          • Weak demand for ICT, slow growth in market, low prices/rates
          • Major customer for software developers and systems integrators is government,
            almost no demand from corporate sector
          • Purchase decisions based almost exclusively on cost, with little regard to
            quality, service, etc.
          • Public and private sectors have yet to see any compelling benefits from
            investment in ICT
          • Large purchasing power differential between Ethiopia and developed countries
            makes many international ICT products and services unaffordable to Ethiopian
            consumers, including to local ICT firms. This problem is compounded by high
            government import duties for ICT products and services



3
    In particular, see Gebreyesus, 2003, p. 34.


Dinyar Lalkaka, BTDS                                                                          March 2004
Ethiopia ICT Incubator Roadmap                                                    Page 12


   2. Difficulty of starting and growing a new ICT business
      • Difficulty financing a new small business
         • Almost impossible to obtain a bank loan due to requirements for collateral
         • No angel investment community means that equity capital can come only
             from self, family and friends
      • Poor business management and human resource practices
         • Inadequate infrastructure of “business development services” (i.e., the
             community of professional service providers serving small businesses)
      • Weak market, difficult environment and poor business practices result in high
         “churn” among new companies and long time to profitability
      • Lack of successful role models

   3. Poor ICT infrastructure
      • Very limited bandwidth and high prices have put most of the benefits of the
         global Internet revolution out of reach for ICT businesses
      • Frequent power outages and fluctuating voltage

   4. Lack of skilled human resources
      • Small number of ICT graduates trained every year, and limited job
         opportunities even for these small numbers
      • Lack of integration between ICT and business training
      • Few or no high-visibility role models

   5. Lack of government support
      • Government has hitherto not placed much emphasis on development of ICT
      • Private sector participation in the provision of telecom services has not yet been
         permitted
      • A meaningful public-private partnership for the development of the ICT
         industry has yet to be established. The relationship between government and
         the private ICT sector appears to remain adversarial.
      • Weak legal and regulatory environment for ICT, e.g., no IP laws in place
      • Weak professional association that has not been successful in articulating the
         needs of the industry and serving as an effective interface with government
      • Lack of transparency in government tender placement and evaluation

   6. Lack of international linkages and globalization
      • Few international ICT companies have established a presence in Ethiopia
      • Limited opportunities for Ethiopian ICT companies to network abroad

As is well recognized by the ICTAD Project, the emergence of a dynamic private sector
will require coordinated efforts in a number of areas. The ETIP business incubator or park
could make a contribution to mitigating many of the constraints outlined above, but it is
likely to have a much greater chance of success if it is conceived and implemented as part
of a synergistic package of initiatives. ETIP can give its client companies an extra boost,
but ultimately these companies must depend on the broader competitive environment for
their growth and success.


Dinyar Lalkaka, BTDS                                                          March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 13




2. Business Incubators and Technology Parks
As there is much misunderstanding and misinformation about business incubators and
technology parks, this section provides a brief overview of the basic concepts and practices
of each. While lack of clarity about these concepts is widespread, it is especially important
that there is good understanding by concerned policy makers and stakeholders in Ethiopia,
before the country embarks on an incubator and/or park program. A workshop on basic
incubator and technology park concepts was held on 12 March at the ICT Development
Authority, and highlights are presented below.

2.1. Business Incubators vs. Technology Parks

Business incubators are facilities which accelerate the successful development of
entrepreneurial startup companies by providing them with an array of business support
services, coordinated by incubator management, and provided both in the incubator and
through its network of contacts. The key elements of business incubation are presented
diagrammatically in Figure 1 below.
                       Figure 1: Elements of Business Incubation




Technology parks have some features in common with business incubators, but also some
important differences. The real estate and infrastructure elements are common to both
parks and incubators, but it is the primary (and often, only) service that parks provide,
whereas it is only one of the many services that incubators provide. Whereas incubators
focus on small companies, typically those still in the startup phase, parks focus on larger,
more mature companies. Small, startup companies require a variety of support services,
from help with their business plans and marketing strategies to assistance accessing
sources of debt and equity financing. In the case of the incubator, these services are
provided through the incubator manager and his/her staff. Assistance in growing their



Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 14

business is less critical to the more mature companies served by technology parks, so the
latter provide fewer or often no business support services.

Incubators typically consist of a single building, while parks are usually comprised of
multiple buildings in a campus-like environment. Incubator area is usually measured in
square meters, whereas parks are much larger, with the area usually measured in hectares.
Just as young children frequently need to buy new clothes because they are growing, young
businesses need to frequently change the amount of space they rent as they grow (or shrink,
when business is bad); therefore, incubators typically provide workspace on flexible lease
terms. By comparison, adults may slowly gain or lose weight, but they do not outgrow their
clothes as quickly as children do; thus parks normally require their tenants to commit to
fixed, long term leases.

Incubators have admission requirements. Not every business that wants to enter an
incubator can do so. They must first submit an application (which often includes their
business plan), and this must be reviewed by the incubator’s admission committee against
clear and transparent admission criteria before a decision to admit or reject the applicant is
made. This is because incubators typically provide subsidized services, and seek to provide
these services only to companies that can make the best use of them. In this respect, an
incubator can be compared to a university that only admits the most qualified students.

Also like a university, client firms are not permitted to stay in the incubator indefinitely.
One of the key objectives of an incubator is to enable its client companies to survive
independently in the competitive market place after a limited period of support in the
incubator. Therefore, after a few years, client companies must leave the incubator and find
commercial space of their own. The amount of time that companies can spend in an
incubator varies from two to five years, partly as a function of the outside environment. As
a rough rule of thumb, the more adverse the local business environment, the longer the
period of time that it is appropriate for businesses to remain in the incubator. Thus, for
example, in Ethiopia, whereas the business environment for ICT firms is difficult for the
reasons described in section 1.5 above, it may be appropriate for incubator clients to stay in
the incubator for as long as five years.

Technology parks, on the other hand, function more like commercial landlords. They admit
companies largely on the basis of their ability to pay the rent or purchase the space. Once
companies move in to the park, they can stay as long as it suits the tenant and landlord.

Incubators typically function on a non-profit basis. Their objective is to promote local
economic development by providing workspace, business services, etc., at subsidized,
below-market rates, because these services are generally not available in the commercial
market, or when available, are unaffordable to startup small businesses. Incubator sponsors
such as governments and NGOs invest in incubators because they believe that incubators
create strong, successful companies, which in turn create jobs and additional tax revenues
for government, and contribute to the achievement of national and local economic
development objectives. Put another way, public sponsors invest in business incubators
because they expect them to create a public return, in much the same way that other public
goods such as roads or schools do. While many incubators in both developed and


Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 15

developing countries receive ongoing public subsidies, there is a growing trend towards
requiring incubators to achieve financial sustainability after a finite period of support.
Typically, public sponsors make an initial investment to establish the incubator and pay for
its operating costs for a period of years, but then expect the incubator to break even on a
cash flow basis from the fees it receives from its client companies.

Technology parks, however, are essentially real estate developments, and like other real
estate ventures, are typically run on a for-profit basis. Unlike startups, mature companies
should have an ability to pay market rates for the real estate they use. Moreover, there is no
need to provide them with extensive support services.

These key differences between incubators and parks are summarized in Table 4 below.
               Table 4: Key Differences Between Incubators and Parks
       Incubator                               Park
       Early-stage, small firms                Mature, medium to large firms
       Emphasis on advisory services           Emphasis on workspace
       Works closely with clients              Clients work on their own
       Single building                         Multiple buildings, campus style
       2,000 – 20,000 m2                       5-100 hectares
       Short-term, flexible leases             Long-term, fixed leases
       Finite tenure (3-5 years)               Indefinite tenure
       Not-for-profit                          For-profit

In concluding this discussion of business incubators versus technology parks, it should be
acknowledged that while the two models are clearly different, in practice, there is a
continuum between the two, and many hybrids exist. Moreover, many entities which have
all or most of the characteristics of business incubators are sometimes called “technoparks”,
“software parks”, etc. Regardless of which model is chosen, as the Government and other
concerned stakeholders in Ethiopia move ahead with their plans in this area, conceptual
clarity is likely to provide the best foundation for informed discussion and successful
implementation.

In the view of this mission, the need for a technology park in Ethiopia is likely to arise in
the medium term, say within the next five years. For the immediate future, it would be
more appropriate to begin by first establishing an ICT business incubator. The reason
for this recommendation is straightforward: ICT companies in Ethiopia are all small,
early-stage ventures in need of the kind of intensive assistance and subsidized services that
incubators provide. In the subsequent discussion, the proposed incubator is referred to as
“the Ethiopia Technology Incubator” or “ETI”. In three to five years, as the first cohort of
companies becomes ready to “graduate” from the incubator, as the ICT business
community develops, and as foreign ICT companies begin to establish a significant
presence in the country, the conditions for a technology park would be more mature.

Since it is recommended that the present focus fall on business incubation, the following
sections examine the development of business incubators worldwide in greater depth.


Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                                                            Page 16


2.2. The Development of Business Incubation Worldwide

Because of the many advantages they provide to their sponsors and clients, business
incubators have grown rapidly over the last three decades. As shown in Figure 2 below,
today there are close to four hundred business incubators worldwide. Moreover, while
incubators have hitherto been more numerous in developed countries, we are now at a
turning point where there are as many incubators in developing and restructuring countries
as in developed ones, and given the continuation of present trends, there will soon be more
incubators in the latter.

Accurate data on technology parks is less readily available, in part because they come in
many different varieties. However, they probably number around one thousand worldwide,
much smaller than the number of business incubators.
                                Figure 2: Growth in Number of Business Incubators Worldwide
                         4000

                         3500
                                                                                                             World
                         3000
  Number of Incubators




                         2500
                                                                                                             Developed
                         2000                                                                                Countries

                         1500

                         1000
                                                                                                                Developing
                                                                                                                 Countries
                          500

                            0
                            85



                                      87

                                            88



                                                      90

                                                           91



                                                                     93

                                                                          94

                                                                               95

                                                                                    96

                                                                                         97

                                                                                              98

                                                                                                   99

                                                                                                        00

                                                                                                             01

                                                                                                                     02

                                                                                                                          03
                                 86




                                                 89




                                                                92
                           19

                                19

                                     19

                                          19

                                               19

                                                    19

                                                         19

                                                              19

                                                                   19

                                                                        19

                                                                             19

                                                                                  19

                                                                                       19

                                                                                            19

                                                                                                 19

                                                                                                      20

                                                                                                           20

                                                                                                                20

                                                                                                                      20


                                          Source: Business & Technology Development Strategies LLC

Business incubation had its origins in the United States in the 1950s. As traditional
manufacturing industries lost their competitiveness in Northeastern states like New York,
the most industrially mature part of the country, factories closed and relocated to other
areas. Local communities were faced with large numbers of unemployed people and
unemployed factory buildings. Local communities came up with the idea of putting both
back together, and encouraging the unemployed people to create new businesses for
themselves in the unemployed buildings in which they used to work. Business incubation
as we know it today was born from this simple but inspired idea.

The model languished in relative obscurity for three decades, with very little growth in the
number of incubators or the use to which they were put. This changed in the mid-80s, as
developments in industrial estates, technology and business parks, business centers,
enterprise agencies, etc., provided stimulus to new thinking on business incubation. The
evolution of business incubation is shown in Figure 3 below.


Dinyar Lalkaka, BTDS                                                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                            Page 17


                 Figure 3: Development of Business Incubation Models



      %&'(



      $ %&,(


                                                                       !

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                              " #                     " #          $
                             !                           !                                !
  )    %&&( *
      $ +(((
                                                      $                                       -
                             !                 !                           !              !


                Source: Adapted from Centre for Strategy & Evaluation Services, 2001

Early business incubators were multi-purpose, that is, they admitted businesses from many
different sectors, mixing manufacturing, services, technology and other types of firms.
Over time, it was found that incubator management could provide more focused and
meaningful assistance to clients concentrated in one particular sector. This gave rise to
sectoral incubators, of which technology incubators are the most common type. But
incubation is a tool that can be applied to enterprise creation in a number of different areas.
Today there are corporate incubators, which large businesses use to stimulate internal
entrepreneurship, arts incubators which assist creative professionals to build profitable
businesses centered around the graphic and performing arts and traditional handicrafts,
women’s and minority incubators, which seek to empower disadvantaged communities
traditionally underrepresented in the entrepreneurial community, and so on.

By the late 1980s, business incubation was being actively promoted in developing
countries by international organizations such as UNDP and UNIDO. Governments in
developing and restructuring countries committed enthusiastically to business incubation
primarily because it was seen as an effective means of jump-starting the development of
new technology businesses, precisely as the Government of Ethiopia now seeks to do. As
governments and other sponsors in developing countries have gained familiarity and
confidence with the model, they are increasingly applying it to promote other objectives,
such as social empowerment, the development of arts and handicrafts, and now even to the
development of the informal sector.




Dinyar Lalkaka, BTDS                                                                   March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 18

As shown in Figure 4, today there are more business incubators in Asia than there are in
any other continent. China leads the pack, with close to five hundred incubators and
incubator-park hybrids. Incubation in China has acquired considerable momentum and is
well on its way to becoming a fully indigenous movement, with large numbers of
experienced incubator managers and active regional and national professional bodies.
Incubation is also popular in other East Asian countries such as Japan and Korea, both of
which claim to have several hundred incubators. Outside East Asia, incubation has
shallower roots, with countries such as India putting more energy into the development of
technology and software parks (though incubation is finally catching on even here).
           Figure 4: Geographic Distribution of Business Incubators, 2003




                         !             "                            (     )     +
                         "    #        "    #         $% #          *               "
                                                        "'
                                                       &&                     ),

                   Source: Business & Technology Development Strategies LLC

Brazil is the industry leader in Latin America, with a strong program heavily supported by
government and closely linked to local universities. Business incubation is also growing in
popularity in Central Europe, Russia and the former Soviet republics of Central Asia,
where it has been driven by the transition from the centrally planned to the market
economy.

For a variety of reasons, business incubation has yet to become popular in Africa, despite
the existence of many dynamic Africa-based enterprise creation programs such as
ENPRRTEC. Those that do exist are concentrated in Arab North Africa and in South
Africa. However, there are signs of change in Sub-Saharan Africa, especially in East
Africa, as countries such as Tanzania, Uganda and Kenya prepare to launch business
incubators and national business incubation programs. While the UN system took the
initial lead in popularizing and funding developing country incubators, today this role is
increasingly being played by the World Bank and its affiliated institutions.




Dinyar Lalkaka, BTDS                                                          March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 19

When we survey business incubation worldwide, it is clear that there are no “global best
practices”, only local good practices. Much can and should be learned from the positive
and negative experiences of other countries, but for incubation to succeed, it must be fully
adapted to the local environment and local needs.

As Ethiopia develops its first incubators, it may be appropriate to make use of incubation
professionals from both developed and developing countries. The community of such
“experts” is larger in the developed world, and at least some of these experts have a more
global view of the field, but in many respects, Ethiopia can also benefit from the more
relevant experience of other developing countries, especially to the extent that these
countries are willing to partner with the Government of Ethiopia and the World Bank to
transfer their know-how. As examples of the opportunities in this regard, in preliminary
discussions with this consultant, the Embassy of China indicated a willingness to further
explore such partnership possibilities.

2.3. Not-for-Profit Status and Financial Sustainability

Just as there is confusion in many circles about what constitutes a business incubator and
how it differs from a technology park, there is also much confusion about the financial
models on which incubators are based. In some quarters, it is assumed that all
“not-for-profit” enterprises must “always lose money”, and therefore naturally cannot ever
be “financially sustainable”. In other cases, the enormous publicity generated by for-profit
“Internet incubators” during the brief “New Economy” boom in 1999-2000 has created the
impression that all business incubators are not only financially sustainable but easily
profitable, by virtue of the lucrative venture capital investments they make in their client
companies. Neither of these impressions is accurate.

In countries where “not-for-profit” status is defined by law, it generally means that if there
is a surplus of income over expenses, that surplus cannot be distributed as profits or
dividends to the shareholders but must be reinvested in the enterprise. This is because
not-for-profit (or non-profit) enterprises exist to benefit the community, and often receive
preferential tax treatment, the benefit of which would be abused if profits were distributed
to private parties. In practice, many non-profits receive temporary or recurring public
subsidies, but this is not intrinsic to their definition.

More than 90 percent of business incubators worldwide, and close to 100 per cent of the
business incubators in developing countries are run on a non-profit basis. In both
developed and developing countries, the majority of business incubators receive recurring
public subsidies. As shown in Figure 5 below, average public subsidies as a percentage of
annual incubator operating income are roughly comparable in Western Europe, the United
States and China at between 20-40 percent of the total. (It is also worth noting, while
looking at these charts, that rental income accounts for between ~40-60 percent, service
fees ~5-20 percent and investment income ~ 1-4 percent. These are useful benchmarks to
keep in mind when planning an incubator in Ethiopia.)

Of course, averages by their nature mask variation, and in each of the three incubator
populations shown below, there are incubators that receive above average rates of subsidy


Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                                     Page 20

and others which receive lower rates or no subsidy. In the case of the survey of Western
European incubators, only 12 percent of the surveyed incubators received no subsidy,
while another 8 percent reported that the elimination of subsidies would have no material
impact on their sustainability; in the U.S. survey, 29 percent reported that they received no
subsidies and another 29 percent claimed they would suffer no material impact if present
subsidies were eliminated (in part because they could readily secure new sources of
subsidy).
    Figure 5: Sources of Incubator Operating Income in Europe, the USA and China




                                                                             !

                                           W. Europe               USA

                                                                                           "
                                                                                       #
                                                       Other, 4%
                                         Investment, 4%
                                Rebated Taxes, 5%

                                   Services, 6%




                                                                         Rental, 57%
                                 China            Subsidies, 23%




Sources: Western Europe - Centre for Strategy & Evaluation Services, 2001; USA - NBIA, 2002 State of the
Business Incubation Industry, 2002; China - Ma Fengling, M.A. thesis, 2003

Although it is not yet the norm, there is an increasing trend towards expecting business
incubators to become financially sustainable on a cash flow basis after an initial period of
public support. The logic of this is two-fold. First, public sponsors have finite resources4.
Second, and arguably more importantly, incubators cannot succeed in their task of creating
market-oriented, entrepreneurial businesses if they are not themselves managed in a
market-oriented, entrepreneurial manner.


4
  However, if the social rate of return on public investment in incubators is greater than that on comparable
public investments, public sponsors should continue to invest in business incubation until the marginal
returns are equalized. The key point here is that public support for business incubation should serve as a
productive investment rather than as a consumption “subsidy”.


Dinyar Lalkaka, BTDS                                                                           March 2004
Ethiopia ICT Incubator Roadmap                                                        Page 21

The amount of time needed for an incubator to break even depends on the environment in
which it is located and the target market which it serves. The more adverse the local
environment and the lower the purchasing power of the target market, the more distant the
expected horizon to breakeven. An incubator in a developed country serving relatively
affluent technology companies could be expected to break even in say three years, whereas
an incubator in a poor developing country serving a disadvantaged community may never
have a realistic prospect of breaking even. Breakeven for the prospective ETI in Addis
Ababa should be calculated on the basis of detailed cash flow projections; however, based
on this consultant’s experience planning, implementing and turning around incubators in
developing countries, while financial sustainability would be an appropriate objective for
ETI, a realistic timeline would be approximately five years from start of operations, given
successful implementation.

2.4. Achieving Sustainability

The previous section showed that financial sustainability is not yet the norm for business
incubators worldwide, but there is a growing trend towards sustainability. Pressure to
achieve financial sustainability is especially strong in the case of incubators funded by
donor organizations in developing countries, as donor projects invariably have a finite span
and national counterpart organizations often do not have the resources to provide
continuing support after project termination.

What exactly is meant by “financial sustainability”? In the case of business incubators, we
typically mean that the incubator requires no subsidy to cover operating expenses. In other
words, we are referring to breaking even on cash-flow, not breaking even in the full
economic sense of recovering initial capital costs.

In principle, there are three roads to financial sustainability for business incubators:

   1. Full cost-recovery pricing of workspace and services
   2. High and stable returns on venture capital investment in client companies which
      can be used to offset losses in pricing of workspace and services
   3. Large initial capital investment, typically in the incubator building and facilities,
      which creates a long-term income stream which can be used to subsidize other
      areas

Of these, the last – a large initial capital investment which creates a long-term income
stream – is the most often used because it is the most realistic solution for non-profit
incubators. In practice, this is usually implemented by local government providing the
incubator with an underutilized building which has a low opportunity cost. The incubator
then owns the building it occupies, or at most pays only token rent. Recurring rental income
from incubator clients thus goes straight to the incubator’s bottom line and can be used to
defray other costs.

The first two routes have been tried by for-profit incubators, but without much success.
Almost all the for-profit incubators that were established between 1999 and 2001 have


Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 22

closed down. While full cost recovery is often possible for workspace, experience
worldwide shows that startup businesses are generally unwilling to pay cost recovery
prices for business support and advisory services even though these are critical to their
growth and success. Nevertheless, full cost-recovery is an important benchmark which
well-managed business incubators can and should try to approach.

Venture capital investment as a road to sustainability works only when equity markets are
extremely buoyant and the incubator is uniquely positioned to attract high-quality
companies (as in the case of a technologically advanced country’s leading technical
university which has preferential access to the best technologies created by its faculty and
students). As shown in Figure 5 above, incubators worldwide typically derive only a few
percentage points of operating income from equity investments in their client companies.
Of the three models, this is the least relevant to Ethiopia. ETI should consider the
establishment of a seed capital fund, but the fund should be operated on a breakeven basis,
not as a source of incubator income.

Worldwide good practice suggests that the most appropriate model for ETI is the first, the
gift of a large “dowry” in the form of a building that creates a sustainable income stream
which can be used to finance ongoing operations. This issue is revisited in Chapter 5 on the
incubator building and facilities.




Dinyar Lalkaka, BTDS                                                           March 2004
Ethiopia ICT Incubator Roadmap                                                          Page 23




3. Objectives, Clients and Sponsors
A “roadmap” should begin by identifying the journey’s destination and participants. This
chapter proposes a mission and objectives for ETI, discusses possible sponsors and their
roles, and concludes with an examination of prospective target markets and client groups.

3.1. Mission and Objectives

According to the Terms of Reference of this mission:

       1.1 The objective of the ICT Technology Incubator initiative under ICTAD is to
           promote technology-based entrepreneurship by pro-actively supporting the
           formation and accelerated growth of new business ventures for technology
           related products, processes and services.

       1.2 The initiative would facilitate creation of the Ethiopia New Technology
           Incubator Park (ENTIP) and support its development to become a center of
           excellence for technological entrepreneurship and development of world-class,
           knowledge-based ventures in Ethiopia, and establish the structure and strategy
           needed to achieve a financially self-sustainable incubator in 3 years.

Accordingly, ETI’s mission can provisionally be defined as:

       ETI will pro-actively support the formation and accelerated growth of
       new technology businesses in order to become a center of excellence for
       technological entrepreneurship and development of world-class,
       knowledge-based ventures in Ethiopia.

Based on discussions in Addis Ababa with the ICT Development Authority, potential
stakeholders and well-wishers, the following are proposed as ETI’s objectives:
   1. Serve as a catalyst for the development of a dynamic ICT sector in Ethiopia
   2. Promote a culture of technological innovation and entrepreneurship, based
      on the competitive advantages of Ethiopia
   3. Serve as a model of public-private partnership in promoting national
      development
   4. Reduce the costs, risks and time to profitability for ICT companies in
      Ethiopia
   5. Provide counseling, training, information, networking, financing,
      workspace and other needed services to technology enterprises in a manner
      that is both affordable and creates genuine value




Dinyar Lalkaka, BTDS                                                               March 2004
Ethiopia ICT Incubator Roadmap                                                        Page 24

   6. Link ICT companies with government, non-governmental organizations,
      universities, banks, professional services firms and medium and large
      enterprises
   7. Promote synergies and opportunities for learning between incubated
      companies
   8. Encourage Diaspora Ethiopian technology entrepreneurs to return to their
      homeland and international small and medium ICT companies to enter the
      Ethiopian market
   9. Graduate at least twenty successful companies in ten years
   10. Achieve cash-flow sustainability in five years
   11. Create a superior rate of social return on public investment, as measured by
       new jobs and taxes created
   12. Embody international good practice in business incubation and serve as a
       model that can be replicated in the ICT and other sectors in Ethiopia, and by
       the World Bank in other countries
   13. Empower women and other disadvantaged communities to create
       successful technology businesses and act as role models for their peers
   14. Create a pleasant work environment where entrepreneurial dreams come
       true

These objectives should be reviewed and modified as appropriate by ETI’s stakeholders
and sponsors, and finalized by the ETI’s Board of Directors before ETI begins operations.
Once finalized, the objectives should serve as benchmarks against which ETI’s progress is
regularly measured.

3.2. Sponsors

“Sponsors” are the “developers” of an incubator. They bring resources to the incubator,
and provide governance by supervising the incubator’s planning, implementation and
operations. Sponsors should look after the best interests of the incubator, and these
interests should be compatible with the interests of their own organizations.

While it is true that the majority of business incubators in developing countries are
sponsored exclusively by government, experience indicates that those sponsored by
public-private partnerships – government and the private sector in partnership –
demonstrate much better performance overall.

Multiple sponsors can mean multiple agendas, which can complicate matters in the short
run as competing interests are reconciled, but this diversity can also be a great source of
strength. Business incubation is inherently a public-private partnership in that it seeks to
mobilize public and community resources to proactively assist the growth of the private
sector. It is therefore much better if the private sector is proactively involved in incubator
governance from the outset.


Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 25

Moreover, one of the most important means by which incubators create value for their
clients is by aggregating social resources, that is, building networks of contacts that can
help businesses quickly find the services, capital, people, etc., that they need in order to
grow and succeed. Multiple sponsors from varied backgrounds can more effectively build
such a network than a single sponsor can.

Finally, governance is a key success or failure factor in business incubation. If sponsors do
not understand and support the objectives of the business incubator, and do not proactively
participate in the incubator’s Managing Board, it becomes much more difficult for the
incubator to succeed. Having more than one sponsor with a stake in the success of the
incubator can be good for governance.

Of course, too many sponsors or sponsors who cannot work harmoniously together can be
a recipe for failure. Two to four sponsors, all equally empowered and committed to the
incubator’s success, make for the best outcomes.

The obvious choice to represent government as a sponsor of ETI would be the ICT
Development Authority of the Ministry of Capacity Building. It is coordinating
implementation of the IDA ICTAD Project and can take a broad and authoritative view of
the development of ICT in Ethiopia. The Ministry of Capacity Building is a “super
ministry” with considerable authority and is in a position to facilitate effective government
and international support for ETI. On the other hand, the ICT Development Authority has a
very busy agenda and is presently very short staffed. Although participating in the
governance of ETI will not require a large input of time and energy, it is possible that even
the modest commitment required may prove cumbersome. Nevertheless, the Authority’s
sponsorship and participation in the governance of ETI would be in the best interests of all
parties, to the extent that it is possible.

The Ethiopia IT Professionals Association (EITPA) would in theory be the most logical
party to represent the private sector. It should be able to impartially represent the industry
as a whole and be close to the problems and needs of its members. Similar associations
have successfully sponsored ICT incubators in other developing countries. Unfortunately,
at present EITPA is more of an idea than a reality. It has few members, few activities,
almost no staff, and cannot yet make legitimate claim to represent the private ICT sector. It
is doubtful that as presently constituted it could serve as a credible partner to the ICT
Development Authority. The best solution would be to give real substance to EITPA, but
this is not likely to be an easy task or one that can be accomplished quickly. Needless to say,
the transformation of EITPA into a powerful industry association would have great
benefits to the ICTAD project as a whole. The example of NASSCOM in India may be
worth learning from.

ETI itself could do a great deal to extending EITPA’s capabilities and credibility. There is
close congruence between the outreach and training capabilities of well-managed
professional associations and well-managed incubators. But it would be a disservice to
both if ETI’s substance was used to fill EITPA’s shell. EITPA and ETI should be given
independent substance in parallel, but with a view to maximizing synergies from the outset.



Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 26

If EITPA is not found to be a suitable sponsor, the Chamber of Commerce may constitute a
good alternative.

Addis Ababa University could be considered as a third sponsor of the incubator. Strong
linkages with knowledge centers such as universities are a critical feature of successful
technology incubators. There is also a strong worldwide trend for technical universities to
seek to link classroom theory with business practice by encouraging students and faculty to
take what they have learned and build successful businesses around it. Addis Ababa
University could provide ETI with a source of aspiring entrepreneurs, qualified human
resources in the form of students who could take part or full-time jobs at client companies,
faculty who could serve as consultants on technical and management issues, access to
equipment and libraries, and the shared prestige of its brand name. Conceivably the
university might own a building that could be suitable for use by the incubator. ETI for its
part could provide Addis Ababa University with opportunities to commercialize
university-owned intellectual property, for faculty to earn consulting fees (possibly split in
some agreed ratio with the faculty member’s department and the university administration),
for students to gain practical experience and find job opportunities, and to expand its
network and prestige. If Addis Ababa University chooses to serve as a sponsor, it should do
so wholeheartedly, not just because it has been required to do so, and it should bring some
concrete resources to ETI.

Depending on how ETI arranges for its workspace, the owner or developer of the building
could serve as a sponsor if he/she were farsighted enough to provide ETI with access to the
building on favorable terms. In many countries there is a “quid pro quo” between
municipal government zoning authorities and private real estate developers in which the
developer gets permission (sometimes in the form of a “variance”) to build the structure
he/she wants in exchange for setting aside some space for a public purpose such as an
incubator. Some developers have given space to incubators at below market prices because
they wish to have first right of refusal to invest in incubated companies. And finally, in a
depressed property market, a developer may be happy to finally have a reliable tenant for
his/her space at any price. An extra benefit to the developer in all these cases is that the
incubator can serve as a “pipeline” of promising companies that can become future tenants
of the developer’s commercial office space after they graduate from the incubator.
Practical examples of all these scenarios exist in both developed and developing countries.
We raise these here only as possibilities, not as a generic recommendation that a developer
should serve as an ETI sponsor.

The World Bank/IDA could serve as a sponsor during the project period or beyond. But it
may find a more appropriate role on ETI’s Board of Directors, to be discussed in the
following chapter. To the extent that international ICT companies can be induced to
provide free or reduced cost services to ETI – and there are many examples of big ICT
companies helping incubators in such ways – these companies may also merit some role in
governance. Unless the contribution to ETI is very significant, a seat on the Board would
be preferable to recognition as a sponsor.




Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 27


3.3. Target Client Groups

The companies housed and supported in an incubator are generally referred to as the
incubator’s “clients”. Sometimes these companies are referred to as incubator “tenants”,
but this usage is falling out of favor because, first, it mistakenly emphasizes incubator
workspace over services, and second, it implies a set of legal tenancy rights which are
inappropriate in this context.

As incubators exist to serve their clients, a thorough understanding of the latter’s needs is
an indispensable prerequisite to good incubator design and implementation. This
understanding is best acquired by a market survey of a representative group of ICT
companies who have been pre-identified as potential clients of an incubator. Since the
private ICT sector in Addis Ababa is small in number and virtually all the companies are
also small in size, it would be appropriate to try to send questionnaires or personally
interview all the companies comprising the sector. Such a survey would also provide
valuable baseline data to the ICTAD Project and to the EITPA. It should be undertaken
shortly after the ICTAD project formally commences.

Based on the investigations of this mission, a number of target client groups can be
preliminarily identified. These include:

   1. Knowledge-based ICT businesses (e.g., software developers, etc.)

   2. ICT-enabled service businesses (e.g., businesses that make extensive use of ICT
      technology but are not focused on developing technology)

   3. ICT sales businesses (e.g., hardware and software resellers)

   4. ICT training businesses

   5. ICT repair and installation businesses (many very small)

   6. Diaspora Ethiopian technology businesses (especially in categories 1 and 2 above)

   7. Technology businesses from other countries, especially small and medium-sized
      ones from other developing countries

It is proposed that ETI focus primarily on categories 1 and 2 above, but endeavor to serve
all these seven groups. While each group has somewhat different needs, each is a member
of the private sector ICT community, each can make a significant contribution to that
community and each can benefit from the others. Moreover, incubators require a certain
critical scale, and require an adequate target market from which to select the most
promising firms. Given the small size of the private ICT sector in Addis Ababa, if ETI were
to focus on only one or two of these groups, or if multiple incubators were to be set up
immediately, critical scale could probably not be achieved, at least not in the next few
years.




Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                     Page 28

Nevertheless, an argument could also be made for establishing two incubators. The nature
and needs of small ICT repair and installation businesses are distinctive, and this group
may warrant a different incubation strategy in an independent facility.

A brief discussion of each of these groups follows.

Knowledge-based ICT businesses are critical to the emergence of a dynamic ICT sector in
Ethiopia. Many ICT incubators in developed and developing countries cater exclusively to
this group, and it should constitute a priority for ETI. There are few companies in this
group at present, but those that this consultant encountered appeared to have good growth
potential.

ICT-enabled service businesses are increasingly recognized as capable of growing rapidly,
creating jobs and having a tangible impact on local and national economies. Such
businesses appear to have been slow to develop in Ethiopia, perhaps because of limited
bandwidth and restrictions on private sector participation in ICT services. ETI could serve
to provide such businesses with the kind of ICT infrastructure presently unavailable or
unaffordable elsewhere. In the view of this mission, businesses such as call centers would
have difficulty in operating from Ethiopia in the near future because of the weak
infrastructure available here now, the large untapped but proven capacity in other
developing countries, and the increasing politicization of outsourcing in developed
countries. The longer term prospects are much brighter, as the lower end of the call center
business is bound to migrate from its present base to lower cost countries over time. As the
call center business is primarily an English-speaking one, Ethiopia is positioned to be a
future player.

ICT sales businesses appear to be one of the few groups that are already experiencing
relatively strong demand because they cater to a broad mass market. There is a greater or
lesser technology component to most of these businesses, with growth and success often
driving them to acquire their own technology base. Powerhouses like Dell have grown out
of simple assembly and sales businesses, as have developing country Fortune 500
companies like Legend Computer (from China). Sales businesses may find synergy with
many of the other groups listed above.

ICT training businesses have an especially important role to play in countries where large
sections of the business community and the population at large are not yet ICT-enabled.
Some developing country-based ICT training firms have grown into profitable
multinationals. Again, there should be opportunities for synergy with other groups.

ICT repair and installation businesses border on the informal sector, but perform a vital
function in a country like Ethiopia where appliances have a life span measured in decades
rather than years. Again, many major companies like Hewlett-Packard have been started
by people tinkering with “junk” in a garage. It may make sense to serve some companies in
this category on an outreach basis (i.e., in their own place of business rather than in the
incubator). The key to working successfully with businesses in this group is to select those
that have the desire and potential to grow.



Dinyar Lalkaka, BTDS                                                           March 2004
Ethiopia ICT Incubator Roadmap                                                           Page 29

Diaspora ICT businesses have the potential to make an important contribution to the
development of the ICT sector in Ethiopia. In many developing countries, the brain drain is
spontaneously reversing itself. When expatriates return to their country of origin, they look
forward to finding the same standards of infrastructure availability, service, etc. they were
accustomed to in their adopted foreign homes. Incubators have proven quite successful in
creating just this kind of optimized microenvironment. In China, for example, so-called
“Overseas Scholars Parks” provide one-stop facilities for Chinese students returning from
universities abroad to set up their own businesses with the benefit of preferential
government policies and a minimum of red tape.

International ICT businesses have already begun knocking on Ethiopia’s doors. While the
Microsofts and Ciscos of the world are more likely to set up shop in prime office space on
Bole Road (though two decades ago, Microsoft did make its first entry into the Japanese
market through a government-run incubator), there are many dynamic medium and small
sized companies, especially from emerging ICT powerhouses like India and China, that
would view ETI as an ideal location for a foothold in Ethiopia. They will be attracted by the
good connectivity, flexible lease terms, affordable prices and opportunities to network with
local ICT firms and ETI management. This will create many interesting partnership
opportunities and assist in the much needed internationalization of the local ICT sector.

Given the diverse needs and economic circumstances of these seven groups, it would be
desirable to tailor workspace and service offerings to the requirements and purchasing
power of each. It should be borne in mind that the choice of incubator building may impose
some constraints on activities undertaken in the incubator, and vice versa. Manufacturing
or retail activities may not be feasible in certain buildings; conversely, if these activities are
deemed essential, this requirement must be borne in mind in selecting and renovating or
constructing the incubator building.

Finally, mention should be made of businesses that while not clients of ETI, could still be
welcome tenants of ETI’s. Anchor tenants are a feature of many incubators. These are
larger companies who do not need incubation services and are wiling to rent space on
commercial terms, thus helping incubator cash flow and allowing for expansion of
incubator space in future if and when demand for incubation increases. On-site service
partners, who often serve as anchor tenants, consist of firms wiling to work with the
incubator to extend its capabilities.

A final possibility worth considering would be the establishment in the incubator of a
business center which would provide temporary office space and business services to
foreign businessmen and representatives of donor organizations in Ethiopia. Though
commercial business center operators such as St. Regis and HQ have established a wide
network in developing countries, there is clearly a lack of such facilities in Addis Ababa,
despite its fairly large international community. A broadband connection is an absolute
must for ETI in any case, and given the extreme difficulty of Internet access in Addis
Ababa, genuine broadband would be a major attraction for potential customers of the
business center. The business center could be run on a for-profit basis, with profits used to
subsidize services to client companies.



Dinyar Lalkaka, BTDS                                                                March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 30




4. Governance and Management
As noted above, poor governance and management is the primary cause of success or
failure for business incubators. Moreover, the primary rationale for incubation is to assist
the growth of startup businesses by imparting sound governance and management
practices. Incubators that are themselves well governed and managed are in the best
position to cultivate good governance and management in their client companies.

ETI should be established as an NGO, legally and administratively independent of its
sponsors. Recruitment should be competitive and salary scales based on those in the
private sector.

4.1. Proposed Organizational Structure

The organizational structure proposed for ETI is shown in Figure 6 below.
                   Figure 6: Proposed ETI Organizational Structure

        Stakeholders                    Sponsors



                                        Executive
                                        Committee
                                                                                Incubator
                                     Board of Directors                        Consultants


                                    General Manager


  Strategic                                                                     Mentors,
                    Finance              Services            Technology
  Partners                                                                      Coaches


                                    Client Companies

                   Anchor Tenants                         Business Center?



This proposed structure includes:

   1. Sponsors, who contribute significant resources to and directly develop ETI, as
      discussed in the previous chapter



Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                        Page 31

   2. Stakeholders, who are members of the community with an indirect interest (or
       “stake”) in the success of ETI
   3. A Board of Directors, composed of representatives of sponsors and stakeholders,
       which sets the strategic direction for ETI, supervises its management and promotes
       its objectives
   4. An Executive Committee of the Board of Directors, composed of sponsor
       representatives, which meets more frequently and makes recommendations to the
       Board
   5. The General Manager, who reports to the Board and has overall responsibility for
       the day-to-day operations of the incubator
   6. Service, Finance and Technology Managers, who report to the General Manager
       and oversee the activities of their respective departments
   7. Strategic Partners consisting of other organizations committed to assisting ETI
       extend its capabilities and improve its cost-effectiveness
   8. Mentors and Coaches drawn from government, the private sector, universities and
       NGOs, who provide general guidance and specific expertise to client companies
   9. Incubation consultants recruited on a short-term basis to advise the Board and
       incubator staff on international good practices in the design, implementation,
       operation and evaluation of business incubators
   10. Client companies, and other tenants and customers of ETI

Key elements of this structure are discussed in the remaining sections of this chapter.

4.2. Board of Directors and Executive Committee

The Boards of Directors is the means through which sponsors and the community at large
oversees and exercises governance over the business incubator. Almost all incubators in
developed countries have Boards, and as do a growing number in developing countries.
They are especially important for incubators having more than one sponsor. In some
developing countries (e.g., China), older incubators typically lack Boards and instead
report directly to a single sponsor. Direct administrative control of this type usually results
in bad (or no) governance, hobbles incubator management and undermines community
support for the business incubator. It is strongly recommended that ETI sponsors exercise
governance through a Board.

The key functions of the Board include

           1.   Establishing strategic priorities and goals
           2.   Long term planning
           3.   Raising funding and obtaining other needed resources and support
           4.   Supervising the work of the General Manager
           5.   Exercising financial oversight and control
           6.   Overseeing legal and contractual obligations
           7.   Monitoring and assessing performance
           8.   Liaison with stakeholders and the community




Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 32

It is essential that members of the Board have an adequate grasp of business incubation,
because they cannot set meaningful objectives for something they do not understand the
function and purposes of. This would be too obvious to be worth mentioning if it were not
so often overlooked in practice. Consultants can often add value to the work of Boards in
this respect.

It is also important to bear in mind that there is a clear difference between governance and
management. Having set the strategic objectives for the General Manager, the Board
should allow him/her to do his/her job and not interfere in the day-to-day management of
the incubator. There are many examples of incubators which have been crippled by
sponsors and Boards which cannot resist meddling in the routine business of the incubator.

Representatives of each sponsor – perhaps more than one representative for major sponsors
– should serve on the Board. Additional members should be drawn from government,
universities and research institutes, banks, international organizations and the private
sector. The General Manager of the incubator could serve as an ex-officio (non-voting)
member. An appropriate size for a Board is approximately ten members. The Board should
meet on a quarterly basis. Members should serve staggered (say three or four years year)
terms, without compensation. By-laws should be established to govern Board procedures,
and should include provision to gracefully remove members who do not contribute or
violate procedures.

The Executive Committee is a subset of the Board composed only of representatives of
sponsors. It should meet more often than the Board. Its function is to manage issues that are
above the level of the General Manager but do not require Board approval (many project
management issues in international donor projects are best handled at this level), and to
deliberate and recommend policy issues for decision by the Board.

While a Board composed of both sponsors and stakeholders is conducive to good
governance, in many developing countries, sponsors do not want others involved in the
decision-making process, or stakeholders are not motivated to participate actively in
organizations they do not belong to. In such cases, a Board consisting exclusively of
sponsors may be sufficient.

4.3. General Manager and Incubator Staff

Just as the quality of a business is largely decided by the quality of its CEO, the quality of
an incubator is largely determined by its General Manager. Attracting, motivating and
retaining a high caliber General Manager is essential to ETI’s success, especially in the
first few years of ETI’s operation when personal experience and motivation must often
substitute for established procedures. Since the success or failure of a large investment in
establishing ETI (millions of dollars) ultimately rests on the General Manager’s shoulders,
it would be wise to compensate him/her adequately.

The General Manager should be able to serve as a role model to the client entrepreneurs.
This means that he/she should have strong business experience, preferably including
entrepreneurial experience. A good knowledge of the ICT industry and ICT technology is


Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                        Page 33

also essential, but not as critical as strong business experience and business sense. The
General Manager must have strong people skills and be motivated to reach out and help
client companies. He or she must have the charisma to motivate people and build loyalty
among both client companies and incubator staff. Finally, he/she should speak and write
good English and preferably have spent some time abroad.

An expatriate Ethiopian with the skills and qualities described above would be an ideal
candidate. Experience worldwide shows that women often make the best incubator
managers, perhaps because they possess the people skills and nurturing abilities frequently
lacking in men.
It is proposed that three managers responsible for Services, Finance and Technology
respectively report to the General Manager. The Service Manager would be responsible
for the coordination and provision of all incubator services – including workspace – to the
client companies, and also marketing the incubator in order to attract new high-quality
clients. He/she must have some business experience and good people skills. He/she should
be the most senior of the three managers and could also have the title of Deputy General
Manager. The Technology Manager would be responsible for maintaining the smooth
operation of ETI’s ICT infrastructure, providing tech support and training to personnel of
client companies, and ideally have some ability to consult for client companies on
advanced technical issues. The Finance Manager should be responsible for keeping ETI’s
accounts, collecting rent and service fees, filing taxes, financial reporting during the
ICTAD project cycle and financial planning. He/she should preserve a clear focus on
tracking ETI’s progress towards financial sustainability, and provide the General Manager
and Services Manager with monthly cash flow status reports and projections. He/she
should also be able to provide client companies with advice and assistance on accounting,
taxes and financial management. Finally, the Finance Manager, under the supervision of
the General Manager, would oversee the operations of the proposed Seed Fund.
Each of these managers should be provided with one assistant. The Service Assistant
would look after the routine support needs of client companies and assist in marketing the
incubator. Again, he or she should be the most senior and best qualified of the staff
assistants. A facilities maintenance person (“handyman”) may also be needed in this
department. The Network Assistant would ensure the smooth functioning of the network
and ICT equipment. The Accounts Assistant would collect payments and assist with
routine accounting tasks. Optional roles include an Executive Assistant and a Receptionist.
These roles may be necessary or desirable in any case, but will be essential if a Business
Center is established. Janitorial, security, and other functions should be outsourced if at all
possible.
The structure proposed above is shown graphically in Figure 7 below. It calls for a total
staff of seven (General Manager plus three departments with two people each) to ten
persons (if we include handyman, executive assistant and receptionist).




Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                         Page 34


                                     Figure 7: ETI Staff

                                    General Manager



  Finance Manager                   Services Manager                    Tech Manager



  Finance Assistant                Services Assistant                 Network Assistant



     Receptionist                  Executive Assistant                    Handyman


              Janitorial, Security, etc., services outsourced if possible

In order for the ETI project to be implemented in an efficient and timely manner, it is
essential that at one person be recruited be recruited within the next two or three months to
serve as Project Manager.

4.4. Staff Recruitment, Compensation and Training

All staff should be recruited on merit through transparent public competition. Sponsors
should be discouraged from seconding their personnel to the incubator. Incubation staff
should be treated as business professionals, pioneering a new discipline of business
incubation in Ethiopia.

Salary scales should be competitive with those in the private sector. In order to achieve
their purpose of providing high-quality support to private sector firms, business incubators
need to be able to recruit staff with high-quality private sector experience. It is often
difficult for public sector sponsors to agree to pay the staff of a subordinate institution such
as an incubator much more than they themselves receive. It is essential, to overcome this
resistance. Moreover, it is people, not buildings that create value through business
incubation. To spend on buildings but stint on staff salaries is a common but unproductive
strategy.

Compensation should be based on performance. Base salaries can be set at a moderate rate,
but a potential bonus of perhaps up to 50 percent of base salary should be linked to the
achievement of clearly specified objectives for the incubator, the department and the
individual.

Staff retention is often a problem in business incubators, especially in developing countries.
Incubator staff are exposed to a wide variety of business challenges and opportunities at
client companies. This means that they can often gain business experience more quickly


Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                         Page 35

than someone working in a single company, but it also means that they have more
opportunities to find better jobs. The loss to the incubator of its investment in human
resource development can be significant. Often many tens of thousands of dollars are spent
on overseas study tours and training, but after a few years, all the trained staff have left and
new staff who no longer have the opportunity to receive training must reinvent the
incubation process based on second hand reports of past practices. Making the incubator a
pleasant working environment and benefits such as medical insurance, partial payment for
continuing education, etc., are often more effective than compensation alone in retaining
staff.

Professional development of staff is especially important in the startup phase, but should
be a continuous process. As noted earlier, senior staff should have some business
experience or education in business management before they come to the incubator.
Training for key staff should consist of:

    •   study of the extensive literature on business incubation
    •   a brief study tour of business incubators
    •   more extended internships at a quality incubator
    •   membership in international incubation associations
    •   on the job training and enrollment in continuing education programs

A study tour of incubators in say one developed country and one developing country
should be undertaken by a small delegation of core staff and sponsor representatives
relatively early in the project planning process, as such first-hand visits are worth a
thousand second-hand reports.

4.5. Coaches, Mentors and Strategic Partners

“Coaches” train entrepreneurs and their key staff in specific skills. “Mentors” serve as role
models and provide seasoned guidance on general business and personal issues. Many
incubators use experienced personnel from universities, NGOs the private sector and
retirees either on a volunteer or paid basis to provide long-term one-on-one assistance to
private companies. The details of how this should be made to work in the case of ETI
remain to be explored.

Strategic partners are other service organizations or firms that provide specialized services
– typically on preferential terms – to client companies. ETI can extend its capabilities and
improve its cost-effectiveness by creating a network of relationships with banks,
accounting, recruiting, legal, advertising, graphic and web design firms. By helping its
clients to identify and access pre-qualified service providers and helping its strategic
partners reach pre-qualified clients, ETI can create a win-win situation for all. The
economies of scale allow the providers to price their services at a discount to typical rates.
Partners are also motivated by the opportunity to build relationships with firms that are
small today but may be big tomorrow. Some partners may establish a presence within ETI
by serving as anchor tenants or by scheduling regular hours when they will be available.




Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 36

It is common for major ICT and other firms to donate or provide reduced-cost products and
services to incubators. Although this is usually done in the name of public service, it
creates cost-effective publicity and goodwill for the donor. ETI should make a strong effort
to motivate firms such as Microsoft, Cisco, Dell, Ethiopia Telecommunications Corp. and
others to donate products and services.

4.6. Consultants
Business incubation is simple in concept but complex in implementation. In this respect, an
incubator can be likened to a hotel: everyone knows that a hotel provides temporary
accommodation to travelers, but not everyone with the financial resources has the
experience and know-how to create a well-managed hotel. A modest investment in
acquiring outside expertise can lead to significant cost savings and greatly improved
incubation outcomes. The ultimate test of any consultancy is building local capacity. A
core project team which will continue with the incubator is the best place to build capacity.
It may also be appropriate to retain national and international consultants to provide
specialized support to incubator clients in critical subjects.

4.7. Integration with other business support services

It is important that ETI integrate as much as possible with other programs that provide
support services to small businesses of al types. This will assist ETI to avoid isolation,
duplication of services already provided by other and political criticism. It will also assist
in cutting costs and maximizing synergy with existing programs.




Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 37




5. Buildings and Facilities Plan
A workspace designed and managed specifically with the requirements of startup
technology companies in mind will be a major source of value for ETI. The incubator
building and facilities are typically the biggest component in the cost of establishing any
incubator, and they are also the most important driver of incubator sustainability, so they
must be planned carefully. While general considerations in the design and management of
incubator workspace can be drawn from international experience, more than any other
aspect of incubator planning and design, this is one where it is often necessary to adapt to
the available options in terms of affordable and available buildings and locations. At the
present stage in the planning of ETI, we are still working from a blank slate. This chapter
outlines general considerations in good incubator building and facilities design, and briefly
discusses some of the expedient choices that may be necessary in the course of
implementation.

5.1. Building Cost

Section 2.4 explained that financial sustainability is typically achieved by the incubator
acquiring a building (or portion of a building) at no or low cost. The difference between its
(lower) cost of workspace and (higher, but still at or below market) income from rental of
workspace to client companies serves as an ongoing source of cash flow which can be used
to subsidize other incubator services. For ETI to achieve financial sustainability, it must
be able to acquire a long-term lease on suitable space at little or no cost.

An existing underutilized but otherwise suitable building that is available to government
would constitute the best solution. Former government offices, light manufacturing
factories and military barracks are examples of some of the types of facilities that have
been converted into incubators. Building a new facility would entail higher costs and a
possibly unacceptable delay in beginning ETI operations. This mission was advised that it
typically takes two to three years after site acquisition to construct an office building.

To the extent that problems of cost and time can be overcome, a new facility that is
custom-designed as an incubator could have advantages. It is sometimes cheaper and
quicker to construct a new building than to renovate an existing one. As noted in section
3.2, in some countries, local governments have sometimes been able to negotiate deals
with private developers that have allowed them to acquire new space at no or low
out-of-pocket cost. A more attractive building in a better location would be likely to be
more appealing to client companies, more sustainable and have a higher political profile.
However, the construction of a new building should be considered only if it can be done
quickly and no suitable existing buildings are available.

It is for the Government of Ethiopia to weigh the options and devise a short-list of possible
sites. This is a matter of urgency, as it will determine the timing of the rest of the ETI
project.


Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                        Page 38


5.2. Location, Floor Space and Layout

As ETI is intended to focus on service- and knowledge-intensive rather than manufacturing
activities, it should be located in a reasonably central area, in proximity to the central
business district, university, public transport, restaurants and shops. It should not be the
first facility in an otherwise undeveloped area. For these reasons, the site of the proposed
industrial park off the Ring Road is not the best choice.

The incubator facility should possess 1,500-2,500 m2 of usable floor space, of which at
least 60 percent should be available to rent to client companies. No more than 40 percent
should be devoted to common areas (corridors, reception, bathrooms, conference rooms,
etc.) and staff use. Existing buildings may not be able to achieve 60 percent of space
rentable to client companies, but in no event should it be less than 50 percent. Every
percentage point of rented space will have a significant impact on cash flow.

Assuming a benchmark of 2,000 m2 of usable space, usage could be broken down as
follows:

       Incubator clients (including anchor tenants): 1,100 m2
       Pre-incubation:                                  50 m2
       Business Center:                                100 m2
       Common areas and staff offices:                 750 m2

This amount of floor space should be sufficient to accommodate 20-30 incubator clients,
depending on the amount of space each occupies. Some space could be occupied by anchor
tenants and on-site partners, especially in the first few years when demand from
prospective incubation clients may be more limited.

The building is likely to require reconfiguration later, as needs change, no matter how well
it is designed, but careful initial planning can make this less costly when it becomes
necessary. For example, floor plates should ideally be uncluttered by multiple pillars and
internal load bearing walls. Layout should promote interaction between clients and
between clients and staff.

The standard of renovation, fixtures and décor should be kept functional and relatively
inexpensive. However, a bright and cheerful atmosphere should be created. “Full
spectrum” fluorescent bulbs are to be recommended. Some attention to interior decoration
with live plants and inexpensive artwork will more than pay for itself by improving
marketability, rental rates and client satisfaction and productivity. Although business
advisory services, access to capital and networks of relationships are as or more important
than workspace to an incubator’s and its clients long-term success, when prospective
clients first think of relocating to an incubator, they usually consider only the workspace. It
is only later that they understand that a good incubator offers much more than just real
estate. Moreover, one of the many advantages a good incubator can offer its client
companies is the prestige of being associated with a reputable “brand”. For these reasons,
attention to appearances is essential to successfully marketing an incubator.




Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                         Page 39

The pre-incubation facility, which could be called the “Innovation Center”– a place where
early stage businesses can use a desk and computer to refine their business ideas and/or
receive assistance from incubator staff without necessarily being admitted as clients to the
incubator – should be an open space partitioned into cubicles, furnished with modular
office furniture and pre-equipped with PCs and broadband connections.

The Business Center should be renovated to a higher standard and provide space on a very
short term basis (perhaps rented by the day) at market rates to visiting businessmen.
Equipment such as photocopier, etc., could be located in the Business Center and used also
by incubator clients.

Other features of the incubator layout to consider include:

    •   Street entrance, which should be uncluttered and make a good first impression.
    •   Front Desk, which should be located near the entrance and present a professional
        and attractive image.
    •   Toilets, for both sexes, preferably located in proximity to conference rooms.
    •   Conference rooms, including two or three small ones and one larger one.
    •   Class room or small auditorium for training and conference purposes.
    •   Small lounge and kitchenette on each floor, with a refrigerator and microwave, or
        whatever is appropriate to local practice, to give client staff a place to eat and
        socialize.
    •   Mailroom, or place to locate client mailboxes.
    •   Parking, adequate for client companies and their visitors.

Optional amenities which could be considered if space permits include:

    •   Storage area, where client companies can securely stockpile inventory, archived
        files, etc., possibly against payment of a fee.
    •   Small gym, to help entrepreneurs reduce stress and keep fit.

5.3. ICT Infrastructure

Broadband connectivity is a must. This should be a central feature, selling point and
money-maker for ETI. Downlink bandwidth should consist of at least 4-5 mbps from the
start, increasing over time as broadband is more widely deployed in Addis Ababa.
Connectivity should be available in every room. The relative costs and merits of running
Cat 5 cabling through the building versus wireless access should be carefully considered.
Even if it is decided to run cable, a few wireless access points should be provided in
conference rooms, etc. Many incubators make money by buying bandwidth in bulk and
“retailing” it to incubator clients, as bandwidth of x distributed to n users where n is a small
number delivers an effective bandwidth to each user that is closer to x than x/n.



Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 40

Bringing genuine broadband to ETI may present technical, financial and other challenges.
A high-speed connection to the Ethiopia Telecom Corp.’s international gateway may not
be very useful if the national uplink bandwidth is fully saturated during business hours, as
it is at present. Solutions will have to be found to these challenges if ETI is to fulfill its
promise as an ICT business incubator.

At some stage, ETI may wish to consider providing its clients with dedicated web hosting
facilities, but this should not be essential in the startup phase.

Incubator staff should be connected to a LAN. Several incubator management software
packages are available, but may be overkill in ETI’s initial years, when lower cost contact
management packages may be adequate to track interactions with clients.

A good PBX system with voice mail and individualized billing capabilities should be
installed. Phone service is a source of income for many incubators. In some developing
countries, cell phones are so ubiquitous and cheap that there is no demand for fixed line
service provided by the incubator, but that appears unlikely to be the case in Ethiopia for
the foreseeable future.

The power supply to the incubator should be reliable, provide stable voltage and be sized
for somewhat higher capacity than in a typical office building, as ICT companies tend to be
above average users of power. The pros and cons of installing a backup generator need to
be considered.

In many incubators, HVAC systems are a must. This may not be necessary given the
relatively temperate climate in Addis Ababa, but this assumption should be tested.

5.4. Accessibility and Maintenance

As the staff of ICT companies often keep irregular hours, client offices should be
accessible from early to late, preferably 24/7. This may have implications for the HVAC
system, as it may be impossible to work when it is shut down. Building security and the
integrity of client offices is another important issue to be considered in light of local
practices and costs.

The importance of good property management and housekeeping cannot be
overemphasized. The facility must be kept clean and presentable. Within a limited budget,
management must ensure that the physical condition of the facility promotes the mission of
ETI both in the short and long term.

5.5. Client Workspaces and Contracts

Client workspaces should be available in a variety of sizes and configurations and should
be easy to modify as needs change. Sizes should range in size from 10 m2 to 100 m2. All
offices should have individual entry from common hallways, and the majority if not all
should have windows.



Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                         Page 41

In developed countries, clients typically enter into a “license agreement” rather than a
“lease” with the incubator. This is similar to the contract a guest enters into with a hotel,
and does not confer the long-term rights (such as protection from eviction) that a tenant
lease would. Legal advice should be sought on the relevant Ethiopian laws and the most
appropriate way of drafting a client contract for ETI workspace.

Typical contracts should be for one year. Standard practice calls for a refundable deposit of
one or two months’ rent and rent paid at the beginning of the month. Some incubators
experience difficulty collecting rent on time. If this is likely to be a problem for ETI, it may
be desirable to introduce a penalty for late rent or a discount for rent paid in advance.

Space should be available in a range of standards and prices. A small computer repair
company, for example, may want simpler and cheaper space than a company belonging to
a returned Diaspora Ethiopian. Based on conversations with representatives of private
sector ICT firms, an appropriate range of rental rates might be from about 30 to 60
birr/m2/month. Rates for short-term (daily or weekly) rental of furnished space in the
Business Center should be whatever the market can bear, perhaps as high as 15-20
birr/m2/day (including basic infrastructure such as broadband).

Instead of charging incubator clients separately for rent and services, there are many good
arguments for charging one composite monthly fee that bundles rent together with some
basic amenities and services. (Specialized services that not everyone is likely to use
regularly would still be charged on an a la carte basis.) First, this makes the incubator’s
value proposition clear - workspace is just one of the many benefits it offers – and
discourages simple comparisons with cheap commercial real estate by prospective clients.
Second, it encourages active use of bundled services. Third, it simplifies billing and
collection. It is recommended that ETI test market reaction, and if feasible, adopt this
bundled approach.

5.6. Short-Term Options

The previous sections of this paragraph have described the requirements of an incubator
facility conducive to financial sustainability, marketing success and the achievement of
positive incubator outcomes. The realization of these requirements is not difficult, but may
take time. If building renovation will require more than twelve months, ETI could begin
initial operations in a temporary facility. Alternatively, ETI could occupy a portion of its
facility while the rest is still under construction. There is inevitably a ramp-up period in
staff training, implementation of incubation procedures, marketing, occupancy, etc., and
this process need not wait until a dedicated, long-term facility is ready for full occupancy.




Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                        Page 42




6. Services and Operations Plan
Just as a hothouse serves to nurture the growth of seedlings into mature plants, an incubator
promotes the development of entrepreneurial startups into dynamic and profitable
enterprises. To continue this analogy, workspace and facilities constitute the fertile soil in
which startup companies take root, while services and operations provide the sunlight,
warmth and moisture necessary for robust growth.

6.1. Incubation Framework

It is proposed that the ETI incubation framework comprise three components:
pre-incubation, incubation, and post-incubation/virtual outreach.

Pre-incubation is intended to serve very early stage ventures, typically an entrepreneur
who is just starting a new company and already has a preliminary plan and product or
service but needs to refine these and build a team, raise financing and take the
product/service to market. Client entrepreneurs would be provided with a desk, PC, phone
Internet access and intensive support and advice by ETI staff. If after a few months the
entrepreneur makes good progress, he/she could be admitted to the incubator as a regular
incubator client if he/she wishes; otherwise, the relationship would be terminated.
Pre-incubation allows the incubator to serve a broader market in a cost-effective manner
and builds a “pipeline” of qualified candidates for incubation. In some cases when it may
not be possible for incubator staff to form a clear impression of the quality of a company
through the standard application procedure, pre-incubation may allow the incubator to get
to know the company better before making a final decision on admission. It is proposed
that the pre-incubation facility be called the “Innovation Center”. Up to about ten
entrepreneurs may be accommodated in the Innovation Center.

Incubation is the core function of the incubator. ETI is expected to accommodate about 20
client companies, though the number could be somewhat higher depending on the needs of
clients for space and services. In light of conditions in Ethiopia, it is anticipated that
incubated companies will spend three to five years in the incubator. Some companies will
fail during this period (i.e., go bankrupt or close down the business for lack of good
business opportunities), others will be making progress but choose to leave the incubator
for other reasons (i.e., they decide the incubator is not the right place for them), and the
remainder will “graduate” as strong, successful companies which are capable of
independent growth in the commercial marketplace. The objective should be to graduate at
least two-thirds and preferably three-quarters of incoming companies.

Table 5 below illustrates hypothetical graduation rates over ten years for an incubator
capable of accommodating twenty client companies. Each “cohort” represents the
companies admitted to the incubator in a given year. For purposes of exposition, it is
assumed that each company is incubated for exactly four years, and all failures occus after
two years. In reality, incubator clients do not fail and graduate in lockstep, and this creates


Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                        Page 43

less “lumpiness” (i.e., rates of movement through the incubator more closely approximate
a continuous variable). By the end of ten years, this hypothetical incubator graduates 35
companies, with another 10 failing or leaving for other reasons before graduation, with a
resulting graduation rate of 78 percent. This example illustrates the important point that it
takes time for an incubator to have an impact, typically ten years or more. Nevertheless,
over say ten years, even a relatively small incubator can make a modest but significant
contribution to the development of a local economy or economic sector. The other
important lesson to be learned from this table is that the average amount of time companies
spend in incubation has a significant impact on the number of graduated companies.
Increasing the average incubation period from four to five years would reduce the number
of graduated companies from 35 to 25.
                        Table 5: Hypothetical Graduation Rates
                Year              1   2   3   4   5   6   7 10 Total
                                                              8   9
                Cohort 1          8   8   6   6   -   -   -  --   -
                Cohort 2              8   8   6   6   -   -  --   -
                Cohort 3                  6   6   5   5   -  --   -
                Cohort 4                      2   2   1   1  --   -
                Cohort 5                          7   7   6  -6   -
                Cohort 6                              7   7  -6   6
                Cohort 7                                  6  56   5
                Cohort 8                                     12   2
                Cohort 9                                     7    7
                Cohort 10                                    7
                Incubated         8 16 20 20 20 20 20 20 20 20
                Failing           0 0 2 2 1 1 1 1 1 1             10
                Graduating        0 0 0 6 6 5 1 6 6 5             35

Post-incubation provides support on a virtual basis – i.e., clients are not physically resident
in the incubator – to companies that have graduated but wish to continue to make use of
incubation services. It can also be extended to companies that are not graduates but wish to
make use of some incubator services without moving into the incubator building.
Post-incubation can serve to ease the transition from the incubator to the commercial
marketplace, can expand the number of clients that an incubator can serve. However, it
holds some potential pitfalls: experience shows that incubation is most effective in the
context of frequent face-to-face interaction, and virtual incubation is more difficult to
implement successfully. Moreover, there is a risk of the incubator over-extending itself and
losing focus if it has too many virtual clients. It is recommended that ETI give primary
focus to core incubation clients and develop its pre-incubation capabilities gradually over
time.

6.2. Range of Services

Value is ultimately created by people and process, not by buildings and hardware. High
quality business support services provided by a competent and motivated staff and credible
strategic partners are the primary means by which ETI can create value for its clients and


Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                         Page 44

successfully position itself in the marketplace. Small firms in developing countries have
not been major users of services, but this is changing, especially in the ICT sector, where
international practices are better understood. The challenges for ETI are to develop high
quality space with basic support, facilities and services that create net value for its clients,
and to market these effectively.

Services offered must address the needs indicated in the entrepreneur assessment survey
and such requirements as emerge in future. An early task of ETI management will be to
design such a comprehensive program, establish a pricing scheme for the separate
components of rent, facilities and services. The main providers of the services will be the
ETI in-house staff with support from strategic partners, mentors and coaches, and national
and international consultants.

The range of support and services includes the following:

1. General networking

Knowing where to get help and assisting clients gain access to people and other resources
is one of the basic services that incubators and venture capitalists provide. By developing a
broad but coherent nexus of partnerships and contacts, ETI can create value for its clients,
its partners and itself.

Crucial to this networking activity is the task of identifying synergies and partnering
opportunities among client firms, and between them and universities, associations, and the
business community at large. ETI staff should adopt an “open door policy” and encourage
clients to stop by and discuss issues of concern. Such general counseling should be covered
in the composite monthly fee.

2. Business planning

Anyone can write a business plan, but preparing a good business plan requires experience.
While the primary responsibility must be left with the entrepreneur, business planning
should be an ongoing dialog between client and ETI staff. Incubator management should
be responsible for working with clients on their business plans, drawing where appropriate
on outside resources.

It could be stipulated in the clients’ contract that the firm agrees to produce a satisfactory
business plan, share it with incubator staff and update it on a regular basis. As fees are
likely to serve as a deterrent to adequate utilization of this service, it would be best to
bundle this general advice with the composite fee. A judgment would be necessary as to
when additional work by ETI warrants a separate fee.

3. Market and Technology Information

Superior access to market information on a timely basis is a key source of competitive
advantage to technology entrepreneurs in today’s economy. ETI staff should assist
entrepreneurs to meet this need by pointing them to resources available on the web, in print



Dinyar Lalkaka, BTDS                                                               March 2004
Ethiopia ICT Incubator Roadmap                                                         Page 45

and through partnering organizations. General assistance should be included in the basic
monthly fee, while specialized research should be billed for separately.

4. Training and Entrepreneurship Development

This addresses a variety of training needs for entrepreneurs and small businesses.
Short-term courses should be designed and run by in-house staff and accredited outside
trainers. The Services Manager should take the initiative in developing such training.
Possible topics could include:

    Business plan development        Small business management       Strategic partnerships
    Financial management             Market research and strategy    Marketing
    Management information           Human resource management       Negotiation skills
    Quality assurance                Intellectual property rights    Mobilizing finance

5. Marketing and Public Relations

Guidance on marketing strategy is best given as part of the business planning process.
Clients should be encouraged to develop separate marketing plans before the launch of
their first product or service. It is recommended that ETI develop a partnering relationship
with a professional PR firm.

6. Financial Management and Accounting

Together with marketing, finance is one of the core skills required to successfully manage a
business. The Finance Manager, together with the accounts assistant, should help firms to
develop sound financial strategies and systems. A short training course on small business
finance and book-keeping should continue to be offered to all incoming clients.

A quarterly meeting with the Finance Manager to review cash flow and key financial ratios
should be included in the monthly fee. Additional services, such as helping businesses set
up accounting systems, could be billed separately. A reputable accounting firm should be
induced to partner with ETI and provide tax preparation and related services to clients at
preferential prices.

7. Legal services

Basic legal advice on general issues of company formation and registration, simple
contracts, etc. should be provided by incubator staff and included in the basic service fee.
More specialized advice should be through a partnering law firm(s).

8. Facilitation

Startup enterprises spend a great deal of time obtaining business registrations, licenses,
permits, etc. Even in the U.S. a survey of ICT startups by Softbank5 found that in the first


5
    See Loren Fox, “Startup Hatcheries,” Upside, December 21, 1999


Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 46

six months, 40% of time was spent on purely administrative tasks relating to starting a new
company. ETI staff should be familiar with government procedures and regulations and be
able to assist enterprises resolve such needs in an expeditious manner.

Startups often need help in conducting important business negotiations, with their clients,
banks and government agencies. A judgment should be made as to how much service of
this type should be included in the basic fee and when it should be charged for separately.

9. Purchasing and Leasing

ETI can exploit the economies of scale that come with having many similar enterprises
under one roof to obtain lower costs for goods and services than clients could obtain when
acting alone. Bulk buying and leasing arrangements may also present an opportunity for
the incubator to generate additional income.

10. Graphic Design

Many small firms frequently need assistance with preparing presentations, brochures,
binding reports, etc. Clients in the Business Center will also require these and other
services such as translation. ETI can provide these as needed on a for-fee basis by working
with free-lancers or partnering firms.

6.3. Pricing of Services

ETI aims for financial sustainability. This means that service pricing must over time
converge with costs, of which the major constituent is staff salaries and benefits. It would
be unrealistic to expect that service income can fully cover costs from the outset, as it will
require time for clients to appreciate the value added by services, for staff to be fully
trained, etc. Further, ETI’s objective is sustainability, not profitability. Startup firms
worldwide are more willing to pay for workspace than for services, and if ETI has a free
building, it should be possible to employ income generated by the former to subsidize the
latter.

It is proposed that each firm be charged a composite monthly fee that bundles the cost of

   (1) workspace (calculated per m2),
   (2) workspace services such as property management, cleaning and security, electricity
       and water,
   (3) ICT services such as broadband connectivity, and telephone dial tone,
   (4) Basic business support services, and
   (5) Some portion of overhead costs.

Fees for specialized services should be charged for separately, based on services actually
used. Fees for services provided by incubator partners, mentors and coaches may be billed
through the incubator or directly by the service provider.




Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 47

Many incubators charge graduated fees based on length of tenure in the incubator, with
firms that have just entered paying lower fees than firms that have been in the incubator for
a longer period. The reasons for doing so include: (1) younger firms have less ability to pay,
(2) it takes time for firms to appreciate the value of incubation; and (3) progressive fees
create a structural mechanism which motivates firms to “graduate” from the incubator after
fees are equal to or greater than market prices for comparable commercial space and
services. Thus, for example, fees could start at 60 percent of market prices and escalate by
10 percent each year till they are equal to market prices by year 4.

Detailed pricing needs to be worked out in a business plan once more specific information
on incubator scale, costs, demand for incubator services, market prices, the level of
budgetary support and incubator objectives (e.g., years available to achieve sustainability)
is available.

6.4. Admission and Graduation

Like students in a university, entrance to an incubator should be selective, and the duration
of stay in the incubator finite, with companies graduating as soon as they are able to grow
successfully on their own.

Admission

Admission should be a structured process, based on evaluation against fairly transparent
criteria. Typical criteria include:

   •   Business with strong growth potential and viable market opportunity
   •   Innovative products or services, broadly defined
   •   Entrepreneur with demonstrable track record, or at least with strong relevant skills
       and high motivation
   •   Entrepreneur has personal financial stake in the company
   •   Quality management team, or the willingness to build one
   •   Preliminary business plan with good market analysis and cash flow statement
   •   Willingness to share basic information about its business and be coached by
       incubator staff
   •   Business is compatible with incubator objectives and environment

The key issue here is that businesses admitted to the incubator should be those with strong
growth potential. Since public resources will be devoted to accelerating the development of
incubated companies, it is vital that these resources be allocated only to those companies
that will be able to make effective use of them. An incubator can be likened to a public
venture capitalist that invests in companies for the social (rather than private) return they
create, and with this difference, incubator admissions criteria are similar to those used by
venture capitalists in deciding which companies to invest in.

Typically, applications will be submitted to the incubator and subject to preliminary
evaluation by incubator staff. Promising candidates will be invited to an interview in which
they make a presentation of their business plan. At this point, they may be admitted,


Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 48

rejected, put on a waiting list if no space is currently available, or given further coaching
(possibly in the Innovation Center) until they are judged qualified for admission. In some
cases, nominations are submitted to the Board for final approval, but this may not be
desirable if it introduces long delays and/or politicizes the admissions process. It is
important that the admissions process be transparent and impartial, and be perceived as
such, in order to resist political pressures to admit well-connected candidates.

Graduation Criteria

While entry should be a competitive, structured process, graduation is a more complicated
decision which requires flexible judgment. Typical graduation criteria include:

       •   Quality management team in place
       •   Proven product or service
       •   Proven market
       •   Adequate capitalization

Companies may be unwilling to leave the incubator if they will have to pay more for
equivalent space and services outside. This is one reason why it is desirable to increase
incubator fees based on the length of time companies have been in the incubator. The
incubator should also work with mature clients to develop a sound exit strategy and assist
them to make a smooth transition to their new workspace. Post-incubation services may
continue to be provided to graduated companies.

In the future, when a technology park is established, incubator graduates could be
encouraged to move to the park.

6.5. Seed Capital Fund

In light of the great difficulties faced by ICT companies in Ethiopia in securing bank loans,
it is proposed that a seed fund of $250,000 be established to provide entrepreneurs with
small amounts of debt financing. The fund is intended to be sustainable but not-for-profit,
much like a microcredit fund. It would charge interest only at the rate required to sustain
operations.

It is provisionally anticipated that typical loans would be short term, say up to six months,
and small, say a maximum of $10,000. Loans would be “secured” (in a loose sense) by the
familiarity of incubator management with the borrower’s personal integrity and the
strength of his/her business, and peer pressure from the incubator community. The
incubator also has recourse to stricter remedies if necessary: it can cut off electricity or
even seal and evict the client business. Such potential sanctions are likely to minimize the
risk of wilful default. Details of the model and sound operating procedures will need to be
devised prior to implementation to ensure transparency and sustainability.

Beyond this basic model, other possibilities could be explored, such as using seed fund
capital as partial collateral against bank loans or factoring against trade receivables. In



Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 49

addition to adequate planning and sound procedures, the seed fund will require some
financial sophistication on the part of management.

The compliance of the proposed Seed Fund with Ethiopian laws and regulations remains to
be investigated.

At this stage, it would not be advisable for the Seed Fund to make equity investments in
client companies. The relatively high risk, need for considerable financial sophistication,
lack of ready exit mechanisms, high potential for conflicts of interest and limited amount of
available capital are all arguments against this. However, it would be desirable for ETI to
take the lead in organizing a network of angel investors. In the future, once this network
has been established and the Ethiopian ICT community is developing vigorously, it would
be natural for ETI to seek to raise financing for a seed equity investment fund.

6.6. Monitoring and evaluation

For-profit businesses are subject to the discipline of the marketplace: if they create value,
they make money and grow, and if they fail to create value, they lose money and ultimately
close down. As not-for-profit entities, incubators are not subject to the same discipline.
This makes the task of monitoring and evaluating incubator performance an especially
important one.

Incubators should keep adequate records of the social value they create in terms of
quantitative indices such as new jobs created and taxes paid by incubated companies.
Quality management methods should be applied to incubator processes and procedures in
order to identify opportunities for performance improvement and cost reduction.
Comparable incubators should be “benchmarked” against one another so as to disseminate
“best of class” practices from stronger incubators to weaker ones. And incubators should
participate in national, regional and international incubator associations to keep abreast of
current trends and innovations.




Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 50



7. Financial Plan
A detailed financial projection is best undertaken once a suitable building (or shortlist of
buildings) has been identified, relevant costs have been thoroughly investigated and a
market study of the needs and effective demand of prospective incubator clients has been
conducted. We are not there yet. This chapter provides some very preliminary
guesstimates of likely costs for startup and operational support.

7.1. Startup Costs

A rough preliminary estimate of startup costs is presented in Table 6. These numbers
should be confirmed through independent cost estimates by local experts. Assuming that
the building is acquired at no cost to ETI, the total startup is projected to be $1,175,000.
The seed capital fund is provisionally proposed to be funded at $250,000.

Detail on specific items is provided below.
                         Table 6: Estimated ETI Startup Costs
                      Item                              Cost Guesstimate

                      Building Renovation Costs
                1.    Permits & licenses                $            5,000
                2.    Architect's design fee            $            30,000
                3.    Renovation costs                  $           400,000
                4.    Electrical                        $            30,000
                5.    Anti-fire system                  $            10,000
                6.    Security system                   $            10,000
                7.    Fittings, signage                 $            40,000
                8.    Furniture                         $            40,000
                9.    Interior decoration               $            20,000
                10.   Kitchenettes                      $             5,000
                11.   Misc. and contingency             $            60,000
                      Sub-total                         $          650,000

                      IT infrastructure
                12.   PBX and phone wiring              $            25,000
                13.   Telephone sets                    $            10,000
                14.   Broadband connection              $           100,000
                15.   Routers                           $            10,000
                16.   Cat 5 cable                       $            10,000
                17.   Heavy duty copier and spares      $             5,000
                18.   PCs (25)                          $            25,000
                19.   Server (3)                        $            15,000
                20.   Network printers (2)              $             3,000
                21.   Misc. peripherals                 $             1,000


Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                           Page 51


                 22.   Projection panel                    $              1,000
                 23.   Software                            $                  -
                 24.   Misc. and contingency               $             15,000
                       Sub-total                           $            220,000

                       Office Expenses
                 25.   Office supplies                     $               5,000
                 26.   Travel & entertainment              $              15,000
                 27.   Marketing                           $              50,000
                 28.   Car                                 $             20,000
                 29.   Misc. and contingency               $             15,000
                       Sub-total                           $            105,000

                       Staff and Consultants
                 30.   Staff salaries and benefits         $              30,000
                 31.   Study tours                         $              50,000
                 32.   Training                            $              30,000
                 33.   National consultants                $              20,000
                 34.   International consultants           $              60,000
                 35.   Misc. and contingency               $             10,000
                       Sub-total                           $            200,000

                       Total                                $         1,175,000

                       Seed capital fund                    $           250,000

3. Renovation costs are estimated at $100/m2 for 4,000 m2 of constructed space.
4. Electrical capacity 20-50 percent higher than typical office building. Includes cost of on-site
    back-up generator.
8. For front desk, conference and training rooms, staff offices, pre-incubation, Business Center,
    etc.
12. 100 lines. Digital, modular, voice mail, individualized billing. Equipment and installation.
13. 100 fixed line, 5 mobile. 30 clients x 2 sets each, 10 staff, + 30 sets distributed between
    pre-incubation and Business Center. One switchboard for Front Desk.
14. Do not have a good basis for estimating this cost. Bandwidth should be at least 2 mbps in first
    year, though 4-5 mbps would be better. Ideally, the connection would be directly to the
    international backbone, thus bypassing congestion at national gateway. Good connectivity will
    be essential to the success of ETI.
16. Cost of materials and labor. Assume two outlets to every room. Wireless may be an alternative.
18. For 10 staff, 10 pre-incubation clients and 5 Business Center clients. May be possible to get
    donation from large ICT co. or buy some reconditioned PCs.
23. Open source and/or donated site licenses.
27. Conferences, workshops, brochures, web site, etc.
31. 2 tours to say US and China by 5 persons (staff and sponsors) for 40 days total.
32. Including internship abroad. May be possible to arrange additional donor assistance.
34. 75 days, 3 trips to Addis Ababa, 60 days in Addis, 15 days support from home office.




Dinyar Lalkaka, BTDS                                                                 March 2004
Ethiopia ICT Incubator Roadmap                                                       Page 52


7.2. Operational Costs

At this stage, it is difficult to make a meaningful projection of ETI operating income and
expenses. However, the annual operating expenses of other comparable incubators (e.g.,
similar size, incubator building available at no recurring cost) in developing countries
range from $150,000 to $500,000. Based on this consultant’s experience, it is reasonable to
assume that normal annual operating expenses for ETI would be around $200,000, with the
cost of international consultants, and audits, evaluations, etc., that may be required by the
IDA loan adding another $50,000 per year to this cost during the loan cycle, for a total
annual operating cost of $250,000.

If ETI were able to start operations at the beginning of the second year of the loan (i.e., by
the end of 2005), this would give it four years of operating history during the loan cycle. It
would further be reasonable to assume that ETI would require financial support in the order
of 80% in Year 1, 60% in Year 2 and 40% in Year 3 and 30% in Year 4. This gives a total
of support required over four years of $525,000.

Therefore, according to these preliminary calculations, the total budget for ETI would be as
shown below:

                         Startup costs:     $1,175,000
                         Operating support: $525,000
                         Seed capital fund:  $250,000
                         Total Cost:        $1,950,000




Dinyar Lalkaka, BTDS                                                             March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 53



8. Implementation Plan
An eighteen month implementation plan is presented in Table 7 below. This is an
ambitious and aggressive, but achievable, schedule. It may be acceptable for this timeline
to slip by three to six months, i.e., for incubator operations to begin as late as the first
quarter of 2006, but in no event should it be delayed beyond then.

The immediate and most critical priority is the identification of possible sites for ETI.
                 Table 7: ETI 18 Month Action Plan (3/2004 – 9/2005)
3/2004        Project Finalization
              Review of this “Roadmap” by MoCB, IDA and stakeholders and
              achievement of consensus on incubator objectives, operational model and
              budget
              Improved estimates of startup costs
              Finalization of ICTAD loan agreement
4-5/2004      Short-listing
              Short-listing of at least 3 possible sites for ETI building
              Short-listing of possible ETI sponsors
              Short-listing of at least 3 possible candidates for initial ETI Project Team.
              Candidates should be potentially capable of assuming the role of ETI GM or
              department manager.
              Short-listing of architects and contractors for renovation of ETI building
              Begin preparations for entrepreneur demand survey
6-8/2004      Preliminary Decisions
              First mission by international consultant
              Decisions on choice of ETI building and person to launch ETI Project Team
              Review renovation options with architects and contractors
              Invite bids by architect, contractor for renovation of ETI building
              Begin publicizing ETI to potential sponsors, stakeholders and clients
              Conduct and analyze entrepreneur demand survey
9/2004        Project Commences
              ICTAD Project formally commences
              ETI registered as a non-profit organization
              Appoint architect and contractor
              Renovation of ETI building begins
10-12/2004    Building Renovation
              Building renovation proceeds
              Sponsors and stakeholders are finalized, Board of Directors and Executive
              Committee are formed
              Preliminary arrangements made for study tour(s) of incubators
              Candidates to fill out ETI management team are recruited
              ETI marketing efforts begin, work begins on preparing ETI web site
1-3/2005      Set-up
              Second mission by international consultant


Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                              Page 54


            Preliminary on-site training of management team
            ETI management team begins writing ETI business plan, with guidance
            from consultant
            Discussions with potential service partners and anchor tenants
            ETI web site is launched
            Marketing efforts in full swing
            Study tour of incubators in developed and developing country
            Call for applications from prospective incubator clients is announced
4-6/2005    Countdown to Launch
            Overseas training for ETI GM and DGM
            Business plan is completed by ETI management team
            Service pricing and operating procedures established
            Building renovation is basically complete
            Finalization of agreements with service partners and anchor tenants
            Final selection of first group of incubator clients
7-8/2005    Soft Launch
            Management team moves in to renovated ETI building
            ICT infrastructure is put in place
            Equipment, furniture, signage, interior decoration is put in place
            Third mission by international consultant
            Remaining staff members are recruited
            Clients begin moving in and setting up their workspaces
9/2005      Formal launch
            Opening ceremony




Dinyar Lalkaka, BTDS                                                     March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 55



9. Vocational Incubator for ICT Microenterprises
As described above, ETI’s primary focus should be on accelerating the growth of formal
sector ICT businesses with high growth potential. These are the kinds of
knowledge-intensive businesses on which the long-term growth and dynamism of
Ethiopia’s ICT sector will depend. Incubators worldwide have established a successful
track record of incubating such companies.

At the same time, in Ethiopia, as in many other developing countries, there is a significant
population of entrepreneur-tradesmen in the business of hardware repair, systems
installation, trouble-shooting, simple assembly and related services. Growth of the ICT
sector and the success of the ICTAD Project may depend in part on the availability and
capability of large numbers of such "barefoot ICT doctors".

While ETI could serve to incubate the larger and more formally organized of the
enterprises in this trade cluster, there is a need to serve the cluster in a broader fashion.
Moreover, the character and needs of these artisanal ICT microenterprises are sufficiently
different from those of other ICT ventures that they may deserve separate – and different –
treatment. A new business incubation model should be developed in order to provide these
ICT-related microenterprises with the support they require. At the end of this mission, the
consultant was requested to develop such an incubation concept, in addition to the
proposed ICT incubator. The discussion in this chapter is provisional, subject to further
study and elaboration.

9.1. A New Incubation Model for ICT Trade Microenterprises

Business incubation worldwide has failed to address the needs of informal
micro-enterprises. The traditional incubation model evolved in developed countries. It
seeks to accelerate businesses that can grow quickly in sales, and presupposes fixed places
of business, contracts, long-term plans and other features which are alien to the informal
sector. As such, it essentially denies that informal enterprises (which lack these
characteristics) can be incubated. In developing countries, business incubation has
generally served only a small minority of organized, formal sector businesses.

Although the business incubation community has neglected the informal sector, some
committed NGOs and donor organizations in Africa, South Asia and Latin America have
accumulated a body of good practice in this area. The Empretec Ghana Foundation,
Enterprise Africa and Enterprise Support Services for Africa (ESSA) have been serving
small businesses in several African countries. The ApproTEC program in Kenya has
addressed technology issues. The clustering of automotive spare parts manufacturers in
Nnewi, Nigeria, in collaboration with their Taiwan suppliers, has made a contribution to
the development of the Nigerian manufacturing sector. The more successful of these
programs have been predicated on a recognition that artisanal clusters are cohesive
communities based on close cooperation between cluster members, and a willingness to
build on existing structures rather than seeking to impose new ones. For incubation to be



Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                        Page 56

truly relevant to the needs of developing countries, it should meld the lessons from
programs such as these with proven incubation models in order to effect a new synthesis.

For informal microenterprises, there is often a tenuous boundary between living space and
trading space. To the extent that ICT tradesmen are already clustered in geographic
proximity, as is commonly the case, it may be appropriate to consider their trading space as
the incubator and the whole cluster as the client. If the physical infrastructure of that
trading space is deficient, it may be more effective to improve the existing environment
rather than attempting to relocate the cluster to a new physical location.

9.2.       Framework for an ICT Vocational Incubator in Addis Ababa

We submit that a new model of business incubation adapted to the unique needs of the
informal sector would shift the focus:

          •   from incubators as buildings to incubation as a process, applied to the
              community in its natural trading and living space,
          •   from incubating individual businesses to incubating a community of businesses,
              and

The objectives of this vocational incubation approach would provisionally be as follows:
       To provide the counseling, training, information, networking, financing, marketing,
       workspace and other services needed to help strengthen the operations of tradespeople
       serving the ICT sector,
       To promote a system where individuals and their groups can cooperate and compete,
       learn from each other by sharing experience, and develop scale-economies in order to
       grow and succeed,
       To serve as the bridge helping these enterprises to move from the informal to the formal
       sector,
       To improve linkages with the remainder of the private sector and the public sector, and
       with external business development services,
       To form a clustering of skills and resources, to be further strengthened by the ICTAD
       program and by interested donor agencies.

Key issues in the development of an ICT vocational incubation system are outlined below,
for further consideration:

Market survey

The design of a practical ICT vocational incubation system requires a good empirical
understanding of the existing situation and developmental requirements of ICT
microenterprises in Addis Ababa. Market analyses of the potential incubation clients
should be implemented as the first step. Services offered by the incubator should be based




Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                      Page 57

on the findings of the market survey. Ideas noted below are preliminary hypotheses to be
tested by the market survey and further empirical investigation.

Services

Training, both technical and in basic business skills, would be the most important of the
incubator services. A close link with a technical or vocational school would provide a good
basis for developing a strong and cost-effective training program. Other services would
include the promotion of external networks with other small business development
services and the private and public sectors. Existing cooperation between community
members and the emergence of new cooperative partnerships should be encouraged. In
time, some cooperative ventures could develop into formally organized firms.

Physical Facilities

Based on the market survey, a street or area where the cluster is (or could be) concentrated
would be identified, one building would be designated as the incubator, and capital
improvements to the area as a whole would be prioritized. The incubator building would
house:

   •   a central workshop with shared repair and testing equipment,
   •   class rooms for training purposes,
   •   shared Internet access,
   •   workspace, for those entrepreneurs that need it, and
   •   office space for incubator staff.

Note that most businesses would operate from their own premises and not move into the
incubator building.

Neighborhood improvements could take the form of constructing new low cost shop fronts
and improving existing ones. Other improvements that may be desirable include better
paving, lighting, sanitation and signage.

ICT Infrastructure

The Internet and mobile telephony have empowered tradesmen in many developing
countries by dramatically expanding their access to information and markets. Both these
tools should be put in the hands of ICT microenterprises in Ethiopia. It is these enterprises
and tradesmen who will be building the infrastructure of the Internet and mobile telephony
in Ethiopia, and they can best prepare for this task by using these tools themselves.
Moreover, low-cost ICT enables new incubation models that allows interaction with large
numbers of microenterprises where they live and work, as opposed to small numbers of
formal enterprises in an expensive incubator building.

Organization, Sponsors and Governance

It may be possible to organize the cluster into a loosely structured guild, with self-
incubation as one of its functions. Outside sponsors should include local municipal


Dinyar Lalkaka, BTDS                                                            March 2004
Ethiopia ICT Incubator Roadmap                                                         Page 58

government and a technical training institute. Governance should build on indigenous
models, modified as necessary. A close relationship should be maintained with ETI.

The governing body should be assisted by an advisory group, which would, among other
things, help to improve the dialogue between the incubator, the private sector and
government agencies.

Staff

We propose a small staff of three or four, possibly supplemented by a technical expert
seconded by a donor organization.

The general manager should be someone who understands the needs of artisanal
microenterprises, and could be someone recruited from their ranks. He or she should have a
good practical knowledge of ICT hardware repair and installation, strong microenterprise
business experience, and should have the ability to build loyalty and trust within the
community and serve as its spokesperson. Responsibilities would mirror those of
traditional incubator managers, and would include providing guidance to cluster members
in developing their businesses and building a network of relationships relevant to the needs
of the cluster.

A training manager would work closely with a vocational school and other microenterprise
development services to provide an ongoing curriculum of applied technical and small
business education. A technical expert seconded by a donor organization would be a great
asset here.

A business or finance manager would administer a small seed capital fund, provide advice
and training to cluster members on bookkeeping, etc., and look after the finances of the
vocational incubator. It would be helpful if the finance manager had previous experience
with a microcredit fund, of which there are several in Ethiopia. An assistant may be needed
to help the finance manager with the seed capital fund.

Consultants

If local capacity for the detailed planning and implementation of this model is unavailable,
it may be advisable to bring in outside experts for this task. Two missions, one for planning
and one for implementation, may be sufficient.

Seed Capital Fund

Lack of capital and access to capital is generally an even more acute problem for
microenterprises than it is for other small enterprises. A seed capital fund affiliated with the
incubator could play an important role in addressing this problem. While the amount of
each loan could be limited to a maximum in the range of say ten thousand birr (to be
confirmed through empirical investigation), which is smaller than the maximum proposed
for the ETI seed capital fund, there is likely to be a greater number of borrowers than in the
case of the ETI fund. Therefore, it may be advisable to keep the size of the fund at about the



Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                     Page 59

same level, i.e., $250,000. The fund would be operated on the general principles of
microcredit.

Sustainability

Further thought needs to be given to the sustainability of this trade incubator. One
possibility would be to organize the incubator along the lines of a trade guild, with modest
membership fees. These fees could then be used to finance all or part of incubation
activities. This would be more feasible if sponsors such as the Addis Ababa municipal
government and a strong trade school were willing to provide a limited amount of ongoing
support.

Budget

         Startup Costs
         Renovation of incubator building                           $50,000
         Office equipment, furniture                                 10,000
         ICT infrastructure                                          15,000
         Electronics workshop with shared equipment                  25,000
         Capital improvements to neighborhood                       100,000
         Marketing, travel, etc.                                     20,000
         International consultants (2 trips)                         40,000
         Miscellaneous and contingency                               40,000
         Startup cost sub-total                                    $300,000

         Seed capital fund                                         $250,000

         Operating support @ $50,000/year for 4 years              $200,000

         Grand total                                               $750,000

Follow-up

This is a very preliminary conceptual plan. It was not possible to conduct any first-hand
empirical investigation of the needs of ICT microenterprises in Addis Ababa. This concept
needs to be discussed by the ICT Development Authority, the IDA loan team and potential
sponsors, stakeholders and donors. The resulting consensus should then be elaborated in a
detailed implementation plan.




Dinyar Lalkaka, BTDS                                                           March 2004
Ethiopia ICT Incubator Roadmap                                                  Page 60



Bibliography
Centre for Strategy & Evaluation Services, "Benchmarking of Business Incubators",
   November 2001

Gebreyesus, Nega, “Information Communications and Technology Private Sector
   Development Framework”, October 2003

National Business Incubation Association, 2002 State of the Business Incubation Industry,
   2002

Rostenne, Jacques, “Private Sector Development Opportunities”, June 2003

World Bank, Country Assistance Strategy for the Federal Democratic Republic of
  Ethiopia, 24 March 2003

Yemene, Getaneh and Berhan Hailu, “Base Line Study on Deployment and Exploitation of
  ICT to Support the ICT Plan Development Process in Ethiopia”, Ministry of Capacity
  Building and UNDP, 3 March 2004




Dinyar Lalkaka, BTDS                                                        March 2004
Ethiopia ICT Incubator Roadmap                                                         Page 61



Annex 1: Terms of Reference

                                      Ethiopia
                      ICT-Assisted-Development (ICTAD) Project

                                  Terms of Reference
                                         For
                           ICT Technology Incubator Initiative

A. Objective of the Consultancy

       1.3      The objective of the ICT Technology Incubator initiative under ICTAD is
                to promote technology-based entrepreneurship by pro-actively supporting
                the formation and accelerated growth of new business ventures for
                technology related products, processes and services.

       1.4      The initiative would facilitate creation of the Ethiopia New Technology
                Incubator Park (ENTIP) and support its development to become a center of
                excellence for technological entrepreneurship and development of
                world-class, knowledge-based ventures in Ethiopia, and establish the
                structure and strategy needed to achieve a financially self-sustainable
                incubator in 3 years.

       1.5      The objective of this consultancy is to develop a project preparation study
                and an implementation road map for the ENTIP in close collaboration with
                the ICT Capacity Building Program of the Ministry of Capacity Building
                (MoCB), Ethiopian Telecommunications Corporation (ETC), and other
                stakeholders (academic, government and community leadership, potential
                techno-entrepreneurs and sponsors). This will be done through consensus
                building to determine the incubator’s objectives, and the responsibilities of
                main partners.

B. Activities

       2.2      The consultancy assignment will be for an individual international
                consultant, for a period of 26 days between February 26, 2004 and March
                22, 2004. The consultant is expected to make one trip to Ethiopia. The
                objective of the trip (approximately 21 days) would be to (i) build
                consensus on the objectives of the incubator or incubator program, (ii)
                undertake a preliminary survey of local conditions, including possible
                sites/buildings, meetings with potential incubator clients, etc., (iii) present
                three workshops, on incubation concepts and models, good practices in
                implementation and operation, and preliminary findings of the mission
                respectively, (iv) complete a preliminary "roadmap".

       2.3 The "roadmap" will develop the following:


Dinyar Lalkaka, BTDS                                                              March 2004
Ethiopia ICT Incubator Roadmap                                                    Page 62

         a. Framework for Proposed ENTIP: The role of the incubation modality for
            accelerating venture creation, in the framework of the objectives of the ICT
            Capacity Building Program and the overall development of Information and
            Communications Technology (ICT) services in Ethiopia.

         b. Market analysis: The profile of potential client-companies has to be
            surveyed, together with their possible needs for services, facilities, finance
            and other support. The availability of existing services will be assessed, to
            help determine the possible support that the Incubator needs and can
            profitably provide. Possible sources of start-up/early stage businesses in
            ICT fields should be covered.

         c. Incubation Options and Objectives: Based on the national conditions and
            constraints for new business venture creation, the general and specific
            objectives of ENTIP will be developed. The responsibilities of the
            executing agency will be delineated. The appropriate business model for
            successful operations in the New Economy, as it is relevant in the
            international and regional market, will be proposed. Options will be
            identified for ENTIP to develop working linkages with universities,
            research institutes, private sector, financing and professional institutions in
            Ethiopia.

         d. Governance structure: The appropriate governance structure will be
            suggested, to give ENTIP the autonomy of operations and private business
            orientation, within the framework of its linkages with government agencies.
            The main functions of key staff should be specified and a program for
            professional development outlined.

         e. Facilities and Services Plan: The requirements of high-tech workspace
            and overall layout of facilities should be developed, to meet the technical
            service needs of clients. MoCB has already designated a building as the
            proposed site for ENTIP. The consultant will evaluate the suitability of
            these facilities for the intended purposes, and will provide appropriate
            recommendations for any additional facilities and/or work that may be
            needed to prepare the site for ENTIP. This would enable the subsequent
            preparation of architectural designs and renovation specifications for
            building and utilities. The services to be provided by the Board and
            management will be identified, including counseling, training, marketing,
            networking and finance. Strategic alliances and professional relationships
            to on-going SME support programs and other activities under ICTAD will
            be proposed. An Innovation Center and Information Unit are envisaged.

         f. Operations Plan: Based on the provisional assessment of the target market
            and the services needed by entrepreneurs, an operations plan will be
            developed proposing the main operating features, the client admission
            process, the selection entry and exit criteria, the bases for developing a
            sustainable fee-for- service and rental fee structure.


Dinyar Lalkaka, BTDS                                                          March 2004
Ethiopia ICT Incubator Roadmap                                                  Page 63

          g. Financial Plan: The financial analysis will set out the estimated cash
             in-flows and out-flows, based on stated assumptions for at least the three
             year execution period and the first two years of operations without ICTAD
             support. The requirements of investment/working capital together with seed
             capital for the client companies will be assessed. The financial plan will
             include an initial assessment of the need for a seed capital facility that
             would be set up within ENTIP to take equity positions in the accelerated
             client companies and attract venture capital sources. The project
             justification, expected benefits and possible risks will be assessed.

          h. Marketing Plan: A marketing plan will be developed to promote the
             Incubator involving the appropriate media and promotional materials. This
             should also help in attracting good partners and client ventures.

C. Deliverables

          1. "Roadmap" in the form of a final report, incorporating all of the above

          2. Presentations for three workshops on (a) incubation concepts and models,
             (b) good practices in implementation and operation, and (c) preliminary
             findings of the mission respectively




Dinyar Lalkaka, BTDS                                                        March 2004
Ethiopia ICT Incubator Roadmap                                               Page 64



Annex 2: Persons Met
Wednesday, 3 March 2004

1. Mr Bekele Gebremehdin, Director, ICT Capacity Building Programme, Ministry of
   Capacity Building, tel: 53 73 12, bekele@telecom.net.et
   Mr Gemechu Geleta, Assistant to Director, ICT Capacity Building Programme,
   Ministry of Capacity Building

Thursday, 4 March 2004

2. Ms Daniela Zampini, Economist (responsible for private sector development), UNDP,
   tel: 44 42 84, daniela.zampini@undp.org

3. Mr John McMahon, Chief, Agriculture and Natural Resources Office, USAID, tel: 51
   07 13, jmcmahon@usaid.gov

4. Mr Menbere Taye Tesfa, Private Sector Specialist, World Bank, tel: 9221406,
   mtesfa@worldbank.org

5. Mr Gerd Ehmsen, Resident Representative, DED, tel: 51 65 99, ded@telecom.net.et
   Mr Hartwig Michaelsen, Coordinator for TVET and MSE Promotion, DED, tel: 51 65
   99, hartwig@telecom.net.et

Thursday, 4 March 2004

6. Mr Bogale Demissie, President, Ethiopia Information Technology Professionals
   Association, tel: 9233983, bogaled@telecom.net.et

Monday, 8 March 2004

7. Dr Dawit Bekele, Assistant Professor, Computer Science Department, Addis Ababa
   University, tel: 09221333, dawitb@ethiolink.biz

Tuesday, 9 March 2004

8. Mr John Jackson, Counsellor (Development), The Canadian Embassy, tel: 71 30 22,
   john.jackson@dfait-maeci.gc.ca

9. Mr Liu Yulin, Economic & Commercial Counsellor, Embassy of the People’s Republic
   of China, tel: 71 00 59, liuyulin1022@yahoo.com

Wednesday, 10 March 2004

10. Mr. Giuseppe Cosentino, Engineer, Sevita Real Estate, tel: 20 05 68




Dinyar Lalkaka, BTDS                                                      March 2004
Ethiopia ICT Incubator Roadmap                                                 Page 65


Thursday, 11 March 2004

11. Meeting with representatives of private ICT firms, including:
    Mr Telahun Deda, General Manager, MKTY Information Technology Services PLC
    Mr Tekeste Berhan Habtu, CEO, Cybersoft
    Dr Ahmed Hussein, Asst. Professor and Chief Consultant, Hilcoe
    Mr Fikre Y. Wondimu, General Manager, Computer Systems House
    (in alphabetical order by family name; list is not complete)

12. Ms Lyndall De Marco, Executive Director, The Prince of Wales International Business
    Leaders Forum, tel: +44 (0) 20 7467 3630, lyndall.demarco@iblf.org




Dinyar Lalkaka, BTDS                                                       March 2004

				
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